A guide to Safe Harbor 401(k) plans, and key deadlines to look out for in 2022
Offering your employees a 401(k) sends a clear message that you care about, and are willing to invest in, their future. If you run one of the 5.8 million small businesses in this country, offering your employees a retirement plan can be a strong competitive advantage that helps with both recruitment and retention. After all, according to our research, 90% of small businesses do not offer their employees a 401(k).
If you’re considering offering your employees a 401(k), you probably already know that doing so makes it easier for employees to save more for retirement. But the process of setting one up can be complicated. The government wants to make sure that everyone — not just highly-compensated employees — gets to participate in a meaningful way. The goal of 401(k) plans, after all, is to prepare more Americans for retirement, not to create a tax break that’s exclusively for business owners and executives.
The IRS has set up a series of what it calls “nondiscrimination” tests that are designed to measure whether a 401(k) plan unduly favors highly compensated employees. If your plan were to fail one of these tests, it could mean making expensive corrections, a lot of administrative work, and potentially even refunding 401(k) contributions.
What is a Safe Harbor 401K?
If that sounds daunting to you, then you may be interested in a special kind of plan called a Safe Harbor 401(k), which can reduce your risk of failing and make things easier down the road. A Safe Harbor 401(k) lets your company’s plan automatically satisfy most nondiscrimination testing.
In order to be a Safe Harbor 401(k), your plan must include fully vested employer contributions that follow specific requirements on how the contributions are calculated. With less to worry about when it comes to nondiscrimination tests, owners and other highly compensated employees can truly max out their deferrals. Does opting into this sort of plan sound ideal for your business? Here’s what you need to know:
Setting up your Safe Harbor 401(k)
The main requirement for a Safe Harbor 401(k) is that the employer must make contributions to their eligible employees’ 401(k) accounts, and those contributions must vest immediately. Put more simply, this means when an employee makes a contribution, the employer must match that percentage amount, up to a certain value. Or, you can set up a Safe Harbor Non-elective plan where the employer makes a contribution even if the employee doesn’t.
Here are what the minimum contributions look like under the three different Safe Harbor plan types:
- Basic Matching: Your company matches 100% of each employee’s 401(k) contributions, up to 3% of an employee’s compensation, plus a 50% match of the next 2% of their compensation.
- Enhanced Matching: Your company matches at least 100% of each employee’s 401(k) contributions, up to 4% of their compensation (not to exceed 6% of their compensation).
- Non-elective Contribution: Your company contributes at least 3% of each employee’s compensation to their 401(k), regardless of whether employees make contributions themselves.
What are the Safe Harbor 401K deadlines?
When it comes to implementing a new Safe Harbor 401(k) plan for 2022, keep in mind the key dates below, which are what we consider to be the absolute latest days for the tasks at hand.
1. New 401K Safe Harbor Plans
Key dates for new 401K plans:
- By or before August 19, 2022: Set up a Safe Harbor 401(k) Plan.
- By September 1, 2022: 30-day notice must be sent to employees (this is only required if you’re making a matching contribution).
- October 1, 2022: Safe Harbor 401(k) Plan is effective and most nondiscrimination testing will be deemed passed for 2022.
2. Safe Harbor Match Plans
With the Safe Harbor match, eligible employees must receive notice 30 days before the plan starts, and initial coordination can take a few days. So, if you’re considering a Safe Harbor plan, time is of the essence!
- By or before November 18, 2022: Request the addition of a Safe Harbor provision to your 401(k) plan for the following year.
- December 1, 2022: 30-day notice must be sent to employees.
- January 1, 2023: Safe Harbor provision takes effect for 2023.
3. Safe Harbor Non-elective Plans
Since there is no employee notice requirement, the timing of adding the Safe Harbor non-elective is much more flexible.
- December 1, 2022: Deadline for adopting a 3% Safe Harbor Nonelective provision to your 401(k) plan with Guideline for the 2022 year (request the amendment by November 5, 2022)
- Under the SECURE Act, if you want to add a Safe Harbor Nonelective provision to your plan, but it is after December 1, 2022, it must be at least 4%.
- December 31, 2023: Deadline for adopting a 4% Safe Harbor Nonelective provision to your 401(k) plan with Guideline for the 2022 year (request the amendment by December 1, 2023).
Is a Safe Harbor 401(k) right for you?
In general, Safe Harbor 401(k) plans are a good choice for companies that fit into any of these categories:
- You’re planning to match employee contributions anyway.
- You want to worry less about nondiscrimination testing.
- Your business is at risk of failing the ADP, ACP, or top-heavy tests.
- You have low participation among rank and file employees.
- You simply want to make sure you take good care of your employees.
With a Safe Harbor 401(k) plan, you can get your retirement savings program up and running quickly to help your team save even more for their future. For more information on Safe Harbor 401(k) plans, check out Guideline or schedule a free call with a retirement specialist.
Disclosure: The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided by our partner.