Every business deserves a retirement plan that supports the employees while maximizing the employer’s own contributions. If you are a small business owner, a Safe Harbor 401(k) plan can help you by benefiting you, your high-level team members and all participating employees. The Safe Harbor 401(k) plan can let you completely skip the hassle of all the administrative work as you can be deemed to pass the IRS annual non-discrimination compliance testing requirements.
What is a Safe Harbor Plan?
The Safe Harbor plan is a 401(k) retirement plan structure for small business owners that allows the employer to maximize their contributions while being compliant with the IRS’s annual non-discrimination testing. As a trade-off for passing the IRS compliance tests, the business owners are required to make minimum contributions to the safe harbor plan every year which must be immediately vested. Safe Harbor 401k provider, Ubiquity, has some additional information on how these plans can work for you.
How does a Safe Harbor Plan work?
The plan is considered to have passed the ADP and ACP test if the plan is not providing more additional benefits to the highly compensated employees. In an event that the 401(k) plan provided by the employer is different than the Safe Harbor and the plan fails the IRS tests, the business owner is required to either make additional contributions to the non-highly compensated employees or return a portion of the contributions made to the highly compensated employees.
Safe Harbor Plans are designed to pass the IRS non-discrimination tests of ADP and ACP which prove that the plan does not discriminate between the employees by providing a more significant benefit to highly compensated employees. Additionally, if the only contributions an employer is making to the Safe Harbor plan are the plan’s contributions and employee deferrals then the plan is exempted from top heavy correction requirements.
What are the Safe Harbor Plan Provision Deadlines?
IRS requires that if you are adopting a new 401(k) retirement plan, the provisions of Safe Harbor plan must be in place for at least 3 months. Hence, to include Safe Harbor provisions for the first plan year, if your business is starting a new calendar year plan, then the plan is required to begin no later than Oct 01st, 2020. You are recommended to contact your plan provider no later than Sept 25th, 2020 since starting a new plan can take time to complete administrative tasks.
If you want to add the provisions of Safe Harbor to your existing 401(k) plan, you can do so before the beginning of the plan year. You are required to provide your employees with a 30-day notice period in this case. Thus, if your plan year begins on Jan 01st, 2021 then, you should request to add the Safe Harbor provisions to your plan before Nov 30th, 2020.
Safe Harbor plan provisions cannot be altered or eliminated during the year except if the plan gets terminated completely. If the plan is ended for any reason, the Safe Harbor contribution would still apply up until the date of termination.