Safe Harbor 401k Plans Becoming Mainstream for Smaller Employers
by LifeInc Retirement Life,Inc.Retirement Services For
some time the conventional wisdom has been that adopting 401k plans is too
expensive and too cumbersome for the smaller business scale. Chief among the
more onerous requirements had been the nondiscrimination compliance testing for
contribution and compensation limits. More efficient systems and greater
competition have made 401k plan adoption less expensive and cumbersome for many
small employers, and, the Small Business Protection Act of 1996 provided
smaller 401k plans with alternative, more simplified methods of meeting
nondiscrimination requirements through the introduction of the “safe harbor
401k.”
As
a result, the 401k landscape can be as friendly for a small business that is
top-heavy with highly compensated employees as it is for a large corporation
with a diverse mix of eligible employees. With a clear understanding of how a
safe harbor 401k plan works, smaller employers can enjoy the many advantages of
adopting a 401k plan, while avoiding many the arduous nondiscrimination
requirements.
The Safe Harbor
Advantage
Generally 401k plans are required
to strictly follow certain nondiscrimination rules that determine the
percentage amount of contributions made by and on behalf of more highly
compensated employees. When a business meets the qualifications for adopting a
safe harbor plan, it can avoid much of the compliance testing while still being
able to allocate certain types and percentages of contributions to its eligible
employees. The safe harbor plan requirements are less focused on the methods as
they are on the outcome – that non-highly compensated and highly compensated
employees receive relatively equal benefits from the plan.
While
there are several options an employer can choose for designing its safe harbor
plan, the primary “equalizer” employed by each is the requirement that all
employer contributions –matching contributions and/or non-elective employer
contributions – must be fully vested at the time they are made.
Matching
Contributions
Under
this option, employers can choose from two different methods of safe harbor
matching contributions. First, a matching contribution can be made that is
equal to 100 percent of an eligible employee’s elective deferral up to 3
percent of compensation. An additional contribution can be made on 50 percent
of the deferral on the next 2 percent of compensation. The second method allows
for a matching contribution equal to 100 percent of deferrals ranging from 4-6
percent of compensation.
Non-Elective
Contributions
Employers
can choose to make a safe harbor non-elective contribution equal to a minimum
of 3 percent of compensation for eligible employees even if they don’t make
elective deferrals to the plan. The non-elective contribution is usually a
percentage that may or may not be tentatively fixed depending on the employer’s
objectives or ability to contribute in a given year; however, it always must be
a minimum of 3 percent of eligible employee’s compensation.
Automatic
Enrollment
A
safe harbor plan may include a qualified automatic enrollment arrangement
(QACA) which allows for a vesting schedule as liberal as a two year cliff instead
of the immediate vesting requirement of the other two options. Under a QACA,
employers can establish an automatic deferral percentage for employees who do
not opt out, not to exceed 10 percent. In the first plan year, the minimum
deferral percentage must be 3 percent, increasing by one percent each year
until it reaches 6 percent which becomes the minimum deferral percentage.
Employers can make a matching contribution of 100 percent on the first one
percent of compensation plus 50 percent on the next 5 percent (3.5 percent
total matching contribution) or a non-elective contribution of a minimum of 3
percent of compensation.
While these represent the primary design
options for a safe harbor plan, there are many variations that can be adopted
depending on an employer’s specific objectives, demographics and compensation
structure. Along with the many variations comes varying levels of requirements
that must be met to ensure compliance with applicable contribution and
compensation limits.
The good news is that designing a safe harbor
401k
plan doesn’t have to be complicated or expensive; and the upside for a
properly designed plan will almost always exceed any costs. However, a poorly
conceived plan, or one that isn’t properly monitored and updated for
compliance, can wreak havoc on an employer. Working with an experienced safe
harbor plan design specialist can ensure your plan is optimally designed and
implemented to fit your
needs, from maximizing certain employees or to just providing retirement
options to your work force.
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Created on Oct 9th 2017 03:16. Viewed 436 times.