6 Reasons to Open a Safe Harbor 401(k) Plan
Safe Harbor plans are a unique type of 401(k). So unique, in fact, that we wrote a step-by-step guide to cover their many requirements, deadlines and the steps needed to set up a Safe Harbor 401(k) plan. But if you’re not quite ready to get started, here are 6 ways a Safe Harbor 401(k) plan can help you, your employees, and your business.
1. Talent retention
According to one study, 77% of all 401(k) plans have an employer match. Safe Harbor plans require some sort of company contribution to employees’ 401(k) accounts, so you would be providing a generous and popular benefit. By opening a Safe Harbor plan you’re investing in your employees’ retirement and incentivizing them to save. Your employees will feel appreciated and happy knowing their employer is committed to their future—which can help your business retain its talented employees in a competitive marketplace.
2. Personal 401(k) savings
All 401(k) plans must pass nondiscrimination testing to ensure that non-highly compensated employees are getting similar benefits to owners and executives. Safe Harbor plans automatically pass the ADP/ACP and top heavy tests, freeing you to max out your personal 401(k) without the stress of failing these tests. How do Safe Harbor plans automatically pass testing? They require a mandatory employer contribution formula. As long as you make a specified match or profit sharing contribution, you usually won’t have surprise refunds or additional contributions at the end of the year.
3. Employer tax savings
As the employer, you can also enjoy additional tax savings for making Safe Harbor contributions. Employer contributions may be deductible as a business expense on the employer’s federal income tax return and are also free from payroll taxes.* In fact, you and your employees may get more value out of these funds than from an outright bonus because of the tax-deferral opportunity a plan offers.*
4. Tax credits
If you’re starting a new 401(k) plan, you may be eligible to receive up to $16,500 in tax credits over a three year period. This credit can offset plan administration costs.*
Included in this $16,500, is a small business tax credit under the SECURE Act. The Act allows small businesses (up to 100 employees) to receive an annual tax credit up to $5,000 depending on how many employees participate in the plan. The credit applies for up to three years and is limited to 50% of eligible plan startup costs, which include plan setup and administration, and employee education. You should talk to your tax preparer about the possibility of using this credit.
5. Easy plan administration
Safe Harbor plans have a lot of additional requirements and regulations. But with the right provider, they don’t have to be any harder to administer than a traditional 401(k). At Guideline, we take care of notice requirements, participant disclosures, contributions, and timing requirements. So the biggest lift you need to make is picking a Safe Harbor contribution.
6. Flexible plan designs
No business is the same. And neither is any business year. As your business grows and changes, certain safe harbor formulas may no longer make sense. Luckily, there are a variety of formulas at your disposal that can ensure your business maintains safe harbor status. Our retirement consultants can work with you to find the contribution that makes the most sense for you and your business, no matter what stage it is in.
* This content is for informational purposes only and is not intended to be construed as tax advice. You should consult a tax professional to determine what types of tax credits or deductions your company is eligible to claim.