I want to start providing 401(k)s to my employees. What kind should I start with?
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Great question. 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.
What are some things to keep in mind?
1. Tests from the IRS: 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 401(k) plan. Three main tests are required by the IRS to help ensure that 401(k) plans benefit both employers and employees. The actual deferral percentage (ADP) test measures, the percentage of how much your highly compensated employees contributes to their 401(k 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 401(k) account in a given year as a total percentage of assets in the company’s 401(k). 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 401(k), contributions.
2. How Safe Harbor can help: A safe Harbor 401(k) can generally help you avoid the uncertainty surrounding annual testing. It’s a special kind of 401(k) that automatically satisfies most non-discrimination testing, unlike traditionally designed 401(k) plans. Safe Harbor plans require companies to contribute to their employees’ 401(k) 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 forms. Either an employer match or a non-elective contribution. This requirement is important because it can help increase savings.
3. IRS deadlines: 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 1st 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. Shifting into existing plans, there are three key deadlines to be aware of. If you are trying to add a Safe Harbor provision to your existing plan, mid-year. 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 have that in place by December 31st of that year. Please note that both of these will be retroactive to January 1st 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.
For more detailed information, you can listen to this podcast episode with Richard Lane, Partnerships Manager at Guideline, a FinTech retirement platform.
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