Why Safe Harbor 401k Is Good for You

Hafiz N Nayla

Why Safe Harbor 401k Is Good for You

Your company’s retirement plan is a vital consideration for the success of your business. After all, in the brutal labor market we are all witnessing, many employees are seeking out jobs that offer competitive retirement packages.

But as an employer, you have many things to consider when selecting a retirement plan for your workers. For one thing, you may be struggling to pick between an IRA, a 401k, or some other type of plan. Each of these options can provide excellent benefits for employees, but they all come with their share of downsides as well.

Fortunately, by selecting a 401k plan and implementing a safe harbor provision, you can effectively side step one of the biggest downsides to a 401k plan: the IRS annual testing requirements.

All About IRS Compliance Testing

When it comes to 401k plans, and retirement plans in general, it’s important that every eligible employee is treated fairly. With regard to 401k plans, the IRS ensures that this is the case by instituting 3 compliance tests every year.

These tests are time consuming and arduous for businesses to deal with. Not to mention, failing any or all of these tests can spell disaster for companies and their respective executives.

The three tests are known as the Top-Heavy Test, the Actual Deferral Percentage Test (ADP), and the Actual Contribution Percentage Test (ACP).

While each of these tests are slightly different from one another, they essentially seek to ensure that plans are fair for all employees and that they do not favor only those who earn the most within a business.

Safe Harbor 401k Plans

Because these IRS tests can be so troubling for businesses, there are certain ways that a plan can be structured which allows businesses to instantly bypass the yearly tests in question. The safe harbor 401k provision is a tool that requires plans to be set up in one of a few ways.

More specifically, with a safe harbor 401k plan, businesses can choose to utilize basic matching contributions to each employee’s account, enhanced matching contributions to each employee’s account, or nonelective contributions to each employee’s account. Furthermore, there are some more nuanced and unique ways to structure contributions that would still allow businesses to bypass IRS testing.

It’s entirely up to you if you want to implement a safe harbor plan. Just know: if you have a 401k plan and you fail any of the IRS tests, the next few months will be filled with paperwork and serious fines.

Setting Up a Safe Harbor Plan

If you want to start a 401k plan which includes a safe harbor provision from scratch, you have to ensure that your plan starts by October 1st 2022. On another note, if you only wish to implement a safe harbor provision to your current 401k plan, you must initiate this process by November 30th 2022.

In the end, there is no requirement to have a safe harbor provision for your company’s 401k plan. However, it is a good idea to have this protection in place for your business. Contact a plan provider today!

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