The Safe Harbor 401(k) plan design is undoubtedly one of the best available. With that said, there are deadlines to adopt a Safe Harbor plan that we have to keep in mind. This article will review the benefits of a Safe Harbor 401(k), the associated requirements and Safe Harbor 401(k) deadlines to establish one, and the most cost effective Safe Harbor 401(k) plan in the industry – READY.SET (k).
What makes a Safe Harbor 401(k) Plan so Attractive?
Briefly, the Safe Harbor 401(k) plan design allows a plan to become simpler to administer while letting owners and Highly Compensated Employees (HCEs) to maximize their deferrals. Traditional 401(k) plans have ADP and ACP nondiscrimination and Top Heavy tests that must be passed for the plan to be in compliance. If a plan fails these tests, there are ways to correct the plan, but it is typically corrected by refunding a portion of an owner’s or HCEs salary deferral. Due to the makeup of a company’s workforce, nondiscrimination and Top Heavy testing may never allow an owner or an HCE of some plans to maximize their salary deferral.
A Safe Harbor fixes this problem but there are certain contribution and vesting requirements an employer must meet.
From a contribution standpoint, the employer has two options. First, they may make a matching contribution equal to 100% of the first 3% of deferred compensation and a 50% match on deferrals between 3% and 5%, for an overall total of 4%. The second option is a 3% nonelective contribution to every eligible employee regardless of salary deferrals. From a vesting standpoint, either contribution must be 100% immediately vested. In exchange for these contribution and vesting requirements, the nondiscrimination and Top Heavy tests are no longer necessary. All owners and HCEs can maximize their contributions. Now that we have reviewed the benefits of a Safe Harbor 401(k) plan let us review the upcoming annual deadlines.
The October 1 Safe Harbor deadline for Current Calendar Year Plans.
To set up a Safe Harbor for the current calendar year, it needs to be established and active on or before October 1 to obtain the Safe Harbor exemption from the ADP and ACP tests for the rest of the calendar year. Once the plan is operational by October 1, employees can still maximize their salary deferral for the plan year even though the plan was only in place for 3 months. To establish a Safe Harbor plan, you have to send out a notice 30 days prior to the start date. Given this, the decision to set up a Safe Harbor 401(k) plan has to be made well ahead of the October 1 deadline. This is why these conversations should be taking place now!
The December 1 Safe Harbor deadline for Plans Effective Next Calendar Year.
If an employer wishes to start a new Safe Harbor 401(k) in the upcoming calendar year, or transition an existing traditional 401(k) to a Safe Harbor plan, the notice to employees must be delivered at least 30 days before the beginning of the plan year, or December 1.
One final consideration when looking at a Safe Harbor plan is your third party administrator. The Retirement Plan Company (TRPC) can collaborate with most recordkeeping providers in offering the most cost effective Safe Harbor administrative package in the industry….READY.SET (k)! The READY.SET (k) package charges plan sponsors a one-time setup fee of $250 and a flat annual fee of $500 with no per participant charges.
Please call TRPC Sales at (877) 371-4276 to learn more or to get started on setting up a new READY.SET (k) Safe Harbor 401(k) plan before the Safe Harbor deadlines arrive.