Understanding and Planning for the Upcoming Safe Harbor 401(k) Deadline

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), then 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.

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 and make things easier down the road. A Safe Harbor 401(k) lets your company’s plan skip nondiscrimination testing under the following conditions:

• Your company must agree to make supplemental contributions to all of your employees’ 401(k) accounts.
• In exchange for making employee contributions, the IRS offers you a “safe harbor” from both the nondiscrimination testing process and the consequences of a failed test.

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 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 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 plan types:

1. 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.
2. Enhanced Matching: Your company matches at least 100% of each employee’s 401(k) contributions, up to 4% of their compensation.
3. 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.

Safe Harbor deadlines

When it comes to implementing a new Safe Harbor 401(k) plan for 2019, keep in mind the key dates below, which are what we consider to be the absolute latest days for the tasks at hand. 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!

Key dates for new plans:

• By or before August 23, 2019: Set up a Safe Harbor 401(k) Plan.
• By September 1, 2019: 30-day notice must be sent to employees.
• October 1, 2019: Safe Harbor 401(k) Plan is effective and exempt from nondiscrimination testing for 2019.

Key dates for existing plans:

• By or before November 30, 2019: Request the addition of a Safe Harbor provision to your 401(k) plan for the following year.
• December 2, 2019: 30-day notice must be sent to employees.
• January 1, 2020: Safe Harbor provision takes effect and exempts the plan from nondiscrimination testing.

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:

1. You’re planning to match employee contributions anyway.
2. You don’t want to worry about nondiscrimination testing.
3. Your business is at risk of failing the ADP, ACP, or top-heavy tests.
4. You have low participation among rank and file employees.
5. 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’s full guide 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 herein.