Safe Harbor 401(k) Plans: Choosing the Retirement Plan Design that’s Right for Your Business

There are three basic 401(k) plan types - traditional 401(k) plans, safe harbor 401(k) plans and SIMPLE 401(k) plans - each with different rules and features that can make one more advantageous than another depending on your budget, workforce demographics, and overall goals for your company’s retirement benefit.

In this article, we’ll explore the basics of safe harbor 401(k) plans and how they fit into the broader spectrum of retirement plan offerings.

Every business will approach offering retirement benefits differently, so you should evaluate all of the available options, and be sure to consult a skilled retirement plan professional before deciding on the best plan for your business.

What is a safe harbor 401(k) plan?

A 401(k) plan is a qualified retirement plan that allows both employees and employers to make contributions to a designated account in a tax-advantaged manner, either by deferring taxes until retirement or paying them immediately and withdrawing the funds tax-free at retirement.

In a conventional 401(k) plan, employees make contributions to the account through payroll deductions, while employers are incentivized to either make contributions on behalf of all participants or match employee contributions based on elective deferrals (or both).

Employer contributions can become vested immediately (giving the employee full ownership of the funds as they are contributed), or be subject to a vesting schedule covering a defined period of time. Learn more about vesting options here.

Importantly, the IRS applies a specific set of rules to traditional 401(k) plans which require that employer contributions meet certain nondiscrimination requirements.

Generally, this is done by performing annual checks known as the Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP) and Top-Heavy tests.

Put simply, this regulatory infrastructure was enacted to ensure that employer-sponsored 401(k) plans don’t prioritize the benefit of highly compensated employees (HCEs) over non-highly compensated employees (NHCEs).

Safe harbor 401(k) plans can become an attractive alternative for employers who are concerned about failing non-discrimination testing, and want to make sure owners and certain other highly compensated employees are not limited in their own contributions.

Specifically, safe harbor plans are similar to traditional 401(k) plans, but with a few minor requirements:

• Employer contributions are fully vested when made (except for Qualified Automatic Contribution Arrangements (QACA) safe harbor plans).
• Employers must adopt one of several pre-approved matching schedules that outline the design of the safe harbor plan (as outlined below).
• Employers must provide sufficient written notice to employees about the safe harbor plan and its design each year between 30 and 90 days before the beginning of each plan year.

Safe-harbor 401(k) plans can be an attractive choice for businesses who desire a simpler, more predictable employer contribution feature.

What are the different types of safe harbor plan designs?

There are four different safe harbor plan designs for businesses to consider when reviewing their options:

• Nonelective contribution — An employer contribution of 3% (or more) of compensation, regardless of employee salary deferrals.
• Basic match — A 100% match contribution of the first 3% of compensation, plus 50% of the next 2% (for a total contribution of 4%).
• Enhanced match — A contribution that must be at least as much as the basic match at each tier of the formula, with a 100% match on the first 4% being the most common.
• QACA — A contribution of 100% of the first 1% of compensation, plus 50% of the next 5% (for a total match of 3.5%). This design also allows for a 2-year cliff vesting schedule.

What do I need to know about the annual reporting requirements?

Employee decisions about their payroll deduction contributions to a 401(k) plan are often based on their knowledge of employer contribution types, matching formulas, vesting schedules, and other plan features.

For this reason, plan sponsors are required to provide all eligible employees with written notice of the plan and its safe harbor contribution design at least 30 days (but no more than 90 days) before the beginning of the plan year.

Often, businesses choose to send this notice alongside other retirement plan information such as the auto-enrollment notice and the funds that are available for the coming year.

How will offering a safe harbor 401(k) plan benefit my business and employees?

Safe harbor 401(k) plans can benefit employers and their employees in the following ways:

• They are typically easier to set-up and administer than a traditional 401(k) plan.
• Employers can provide a high quality retirement benefit for ALL of their employees.
• Employers can receive tax benefits from the employer contributions that they make.
• Business owners are not limited in how much they can contribute by testing failures.
• Contributing employees are assured of receiving employer contributions that are immediately vested, or in the case of a QACA safe harbor, vested within 2 years.

Work with an experienced retirement plan professional to set up a safe harbor plan for your business today.

Associated Bank retirement plan consultants will work with you to understand your business and workforce to help you choose the right plan for your organization.

Schedule an appointment with a local retirement plan consultant to explore options for your organization.

Together, we can help you build a retirement program that honors your employees and eases your administrative burdens.