The selection of a Safe Harbor 401(k) depends on several factors, such as the total number of employees participating in the plan and their respective percentages of salary deferral. Generally, firms with a low headcount and a significant number of highly compensated employees opt for such plans because they enable employees to squire away funds above and beyond the requirements in traditional 401(k)s. Safe Harbor 401(k)s require research and assessments before they are setup. One of the most important steps in setting up a Safe Harbor 401(k) is employee notification.Įmployers are required to provide notification of rights and obligations to employees at least 30 days prior (and no more than 90 days earlier) to the plan’s commencement. Thus, businesses should have a plan to convert existing 401(k)s into their safe harbor equivalent by November 15. The deadline to convert an existing plan to a Safe Harbor one is Jan 1. Existing 401(k)s can also be converted to Safe Harbor 401(k)s. The deadline to start a Safe Harbor plan is October 1. In a Qualified Automatic Contribution Arrangement (QACA), employers can either match 100% of an employee’s contribution up to 1% of his or her contribution and make a 50% matching contribution for the next 5% or they can make a 3% nonelective contribution to all participants of the 401(k).īecause they are similar in scope and structure to 401(k)s, Safe Harbor 401(k)s have a similar application process.In an Enhanced Safe Harbor 401(k), employers match 100% of the first 4% of each employee’s contribution.In a Basic Safe Harbor 401(k), employers can contribute 100% of the first 3% of each employee’s contribution and 50% of the next 2%.In a nonelective Safe Harbor 401(k), employers contribute 3% of matching contributions and it is immediately vested.There are four ways to set up a Safe Harbor match: Safe harbor 401(k)s allow for immediate vesting of contributions, meaning ownership of contribution is immediately transferred to employees without vesting periods. By implementing a Safe harbor 401(k), businesses can help highly compensated employees reach the maximum deferral limits. The maximum deferral limit in Defined Contribution Plans is $19,500. Therefore, if the remaining employees of a firm make an average investment equal to 3% of their annual salaries, highly compensated employees cannot contribute more than 5% of their salary to their 401(k) by law. The general rule is that highly compensated employees cannot contribute more than 2% more than average of all employees. This is because they set artificial limits on the percentage of their compensation that such employees can contribute to their plan. The nondiscrimination tests can end up adversely affecting retirement savings for senior executives and highly-compensated employees or employees who earn more than $130,000 annually, as of 2020. The ADP ensures that deferred salaries for all employees are equal to the same percentage of their annual compensation while the ACP ensures that the employer’s contribution match, in terms of salary percentage, is equal to that of the employee. In a traditional 401(k), employers must perform annual tests known as Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP).
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