Q&A: Why a Safe Harbor 401k might be the right fit

Richard Lane, Partnerships Manager at Guideline
Aug 11, 2022

According to a recent AARP article, 48% of Americans age 55 and older have no retirement savings. This is a staggering number is what we call the “retirement crisis.” And it’s even more exaggerated within small businesses. To help share the importance of offering a 401(k) plan and doing so easily is Richard Lane, Partnerships […]

According to a recent AARP article, 48% of Americans age 55 and older have no retirement savings. This is a staggering number is what we call the “retirement crisis.” And it’s even more exaggerated within small businesses.

To help share the importance of offering a 401(k) plan and doing so easily is Richard Lane, Partnerships Manager at Guideline, a FinTech retirement platform. Listen in as he discusses how a Safe Harbor 401(k) can add flexibility to your company’s retirement plan.

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On this episode, you’ll hear:

  • [00:52] The 401k access gap
  • [02:00] Three tests your plan has to pass
  • [03:15] How you can ensure your plan remains compliant
  • [05:09] Details around employer match
  • [05:47] 401(k) deadlines to be aware of


Hi there and welcome to pops. The show that shows you how to shift your human resources, paperwork to people, operations for the new world of work. How by entering one question at a time, my name is Richard Lane. I’m a Partnerships Manager here at Guideline, a FinTech retirement platform. I’ve been at guideline since 2017 with a focus on helping to scale the business through sales and partnerships.

I am here to help answer the question on how a safe Harbor 401k can add flexibility to your company’s retirement plan. Before we dive into the primary topic today. Which is how a safe Harbor 401k plan can help your business remain compliant while adding extra flexibility. I wanna quickly highlight the 401k access gap.

According to a recent, a, a R P article 48% of Americans, 55 and older have zero retirement savings. This is a staggering number and is what we refer to as the retirement crisis. This retirement crisis is even more drastic for the small business segment. There are more than 5.8 million small businesses defined as one to 99 employees in this country employing 42 million people of the 5.8 million businesses.

90% of them do not offer a 401k. Of the 42 million people of that small business, subset, 75% of them don’t have access to a retirement plan. And when you look at small businesses as a whole, they make up 99.7% of all employers in the us. So this is what it means is that there’s a huge retirement gap for small business employees, making it even harder for them to save for.

Guideline was created to address this retirement crisis. And we here at guideline work to combat this retirement crisis every day. Now to shift gears, let’s talk about why we are here today. Safe Harbor. You probably already know that offering a 401k makes it easier for employees at your company to save more for retirement.

But the government wants to make sure that everyone not just highly compensated employees, gets to participate in a meaningful way. The goal of 401k plans after all is to prepare more people for retirement, not to create a tax break. That’s exclusively for business owners and executive. To make sure everyone has a chance to benefit from the plan their employer offers.

The IRS has set up a series of what it calls non-discrimination tests that are designed to measure whether a 401k plan. Unruly, fairly highly compensated employees. There are three main tests that are required by the IRS to help ensure that 401k plans benefit both employers and employees, the actual deferral percentage ADP test measures, the percentage of how much your highly compensated employees.

Which is defined as one who either makes more than $135,000 a year, or is someone who owns more than 5% of the business contributes to their 401k as compared to the rank and file employees. The actual contribution percentage ACP test is similar to the ADP test, but measures the amount of employer matching contributions that go into the highly compensated employee accounts as compared to everyone else.

The third test, the top heavy test looks at the individuals defined as key employees and measures the value of the assets in their 401k account in a given year as a total percentage of assets in the company’s 401k. A key employee is an officer earning over $200,000 in 2022 or one who owns more than 5% of the business or one who owns more than 1% of the business and earns over $150,000 a year.

If your plan fails, any of these tests, you’ll have to deal with some administrative hassle, potentially expensive corrections and the possibility of refunding 401k, contribu. So how do you as a business owner help to ensure your plan remains compliant with these non-discrimination tests, a safe Harbor 401k can generally help you avoid the uncertainty surrounding annual testing, a safe Harbor, 401k as a special kind of 401k that automatically satisfies most non-discrimination testing.

Unlike traditionally designed 401k plan. Safe Harbor plans require companies to contribute to their employees’ 401k accounts. But in exchange, these plans get safe Harbor and automatically satisfy some IRS non-discrimination tests, which can mean fewer headaches for small business owners and more savings for everyone.

Safe. Harbor plans require that you contribute to your employees, 401k accounts in one of two. Either an employer match or a non-elective contribution. This requirement is important because it can help increase savings. According to a recent survey by bank rate, more than half of American workers say they’re behind on retirement savings.

The employer match is typically a four, five or 6% employer match. Whereas the non-elective contribution is typically a 3% flat contribution to all eligible employees, regardless of how much they’re contributing to their accounts. An additional thing to note as well, is that safe Harbor employer contributions typically must be 100% vested, immediately safe Harbor plans are extremely popular as of may of 20 22, 60 9% of guideline clients offer a safe Harbor match or nonelective contribution.

There are also some key, tiny stipulations to be aware of as. The IRS deadline to set up a new safe Harbor plan with a 2022 start date is October 1st. Existing plans may be able to switch to a safe Harbor matching plan. Effective January. First of the next plan year eligible employees must be notified in writing at least 30 to 90 days before the safe Harbor plan takes effect.

However, now, shifting into existing plans, there are three key deadlines to be aware of. If you are trying to add a safe Harbor pro provision to your existing plan, mid. If you were looking to add a 3% nonelective contribution to your plan for that existing plan year, you must have that in place by December 1st to be effective for that year.

Additionally, if you’re looking at a 4% nonelective contribution to your plan for that existing year, you must add that in place by December 30. First of that. Please note that both of these will be retroactive to January. First of that given year for all eligible employees. If you opted to add a safe Harbor match to your existing plan for the next calendar year, that match and safe Harbor designation will go into place January 1st.

The deadline to set up a new guideline, safe Harbor match 401k plan with a 2022 date is going to be Friday, August 19th, to allow sufficient time for your employees to enroll in the plan and provide the necessary notice before the October 1st safe Harbor deadline. We’re also so excited to announce that we are waiving the first month of employer fees for any new plan that’s set up before the August 19th.

Please visit guideline.com/safe Harbor. To learn more about the terms and conditions that apply. I hope that this content was helpful to everyone to understand how a safe Harbor 401k can be a helpful tool to remain compliant with these IRS non-discrimination tests. We’re adding extra flexibility to your plan.

Do you have a question for us? Click the link in the show notes, or if you’ve got other ideas and feedback about our show, send them to podcast incentives.com. Thanks so much and happy savings.

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