Retirement plans provide huge incentives to prospective employees. Many job applicants will strongly consider a company’s retirement plan when they decide whether or not to accept a job offer.
For this reason, many companies now routinely offer retirement benefits to their employees. But one of the most popular types of retirement plans, the 401k, is highly regulated by the IRS.
In fact, the IRS administers compliance testing every year to ensure that companies’ retirement plans are fair for all contributing employees.
Luckily, there is an easy way to breeze past these IRS tests each year: The Safe Harbor 401k provision.
Safe Harbor 401k: What’s it All About?
The Safe Harbor 401k plan is one that is specifically structured so that businesses do not have to be concerned that they won’t pass the three annual IRS compliance tests. These tests are designed to ensure fairness in retirement planning. Specifically, the three tests are:
- The ADP Test. The Actual Deferral Percentage Test places a ceiling on how much higher-wage earning employees within a business can defer into their retirement account. This amount is determined based on the average contribution rates of the lower-earning employees within the company.
- The ACP Test. The Actual Contribution Percentage Test looks at employer matching.
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This test is designed to ensure that highly paid employees are not receiving unfair matching contributions as compared to lower-earning employees.
online pharmacy flagyl with best prices today in the USA - The Top Heavy Test. The final compliance test administered by the IRS is known as the Top Heavy Test. This measure analyzes plan balances to determine whether the most well-compensated employees within a company cumulatively maintain more than 60% of the total balance of the retirement plan. If this is the case, your 401k plan would be considered top-heavy and you would fail this test.
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Failing one or more of these tests is something all businesses should strive to avoid. The consequences of failing an IRS test are significant corrective paperwork, fees, and general headaches for business owners.
How Does the Safe Harbor 401k Protect Businesses from Failing Compliance Tests?
The plan ensures fairness by requiring employer matching in one of three ways:
- Basic Matching. With a Basic Match, employers must match 100% of employee contributions, as much as 3% of an employee’s annual salary, with an additional 50% match of the following 2% of 401k deferrals.
- Enhanced Matching. Enhanced Matching necessitates that employers match 100% or more of employee contributions at as much as 4% of annual salary.
- Non-Elective Contributions. When it comes to non-elective contributions, employers are required to contribute 3% or more of every employee’s salary to everyone enrolled in the plan. These contributions are made regardless of how much an employee contributes individually.
Is There Still Time to Set up a Safe Harbor Plan in 2021?
Unfortunately, the deadline of October 1st has passed for setting up a new Safe Harbor 401k plan.
However, for those that wish to add a Safe Harbor provision to their current 401k plan, there is still time. November 30th is the deadline for modifying current plans to add this provision.
