6 reasons to open a Safe Harbor 401(k) plan
While many businesses and HR teams want to offer a 401(k), the compliance and administration headaches can become blockers to following through. Luckily, there's a type of 401(k) plan that can help make offering retirement benefits even simpler.
A Safe Harbor plan is a special kind of 401(k) that can help boost employee participation, reduce administrative work, and automatically satisfy most nondiscrimination testing. These plans require sponsors to offer a match, which encourages participants to save more for retirement. When plan sponsors take this step to encourage more employees to participate, the IRS provides them with a "safe harbor" from certain nondiscrimination testing processes and the costly consequences of failure.¹
If this concept is new to you, you're not alone. Data from a recent survey found that more than half of retirement benefit decision-makers are unaware of or unfamiliar with Safe Harbor 401(k) plans.² And even though about half of the respondents said they knew about Safe Harbor 401(k) plans, only one-third of them could correctly identify the plan design’s marquee benefit — that it is a 401(k) plan that satisfies most nondiscrimination testing.
Below we’ll take a look at just a few of the many ways a Safe Harbor 401(k) can help you, your employees, and your business:
1. With a Safe Harbor plan, all employees can maximize savings
All 401(k) plans must pass nondiscrimination testing to ensure that non-highly compensated employees benefit similarly to owners and executives. Safe Harbor plans automatically pass the ADP/ACP and top-heavy tests, freeing all employees to max out their 401(k) without the stress of failing compliance tests.
How do Safe Harbor plans automatically pass these tests? 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.
2. Plan sponsors can save money on taxes
As a plan sponsor, you can enjoy additional tax savings for making Safe Harbor contributions. Employer contributions may be deductible as a business expense on your 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.³
3. New plan sponsors can receive up to $16,500 in 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.³
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 of 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, including plan setup, administration, and employee education.
4. Safe Harbor plans are easy to administer and manage
Safe Harbor plans have a lot of additional requirements and regulations. But with the right provider, they don't have to be any more complicated to administer than a traditional 401(k). At Guideline, we handle notice requirements, participant disclosures, contributions, and timing requirements. In fact, plan administration on a Guideline Safe Harbor 401(k) takes less than 30 minutes a month for most plan sponsors.²
5. A Safe Harbor 401(k) can help you retain top talent
According to a recent study, 40 percent of employers believe workers leave their role to find a job with better benefits. Over the past few years, employees have increasingly recognized the significance of saving for retirement. To attract and retain top talent, offering a 401(k) can be just as impactful as a competitive salary and healthcare coverage.
All Safe Harbor plans require some sort of company contribution. By offering a company-sponsored 401(k), you are not only providing a generous and popular benefit — you're investing in your employees' retirement and incentivizing them to save for their future. This can help get new talent in the door in an increasingly competitive marketplace and keep them there for years to come.
6. Safe Harbor plans are flexible for businesses of any size
There's a common misconception that Safe Harbor 401(k) plans are best-suited for small businesses. But in reality, their benefits extend far beyond size, making them an ideal choice for companies of all scales. In fact, the number of businesses with 100+ employees offering a Guideline Safe Harbor 401(k) increased 35% over the past year.⁴
Though we've already touched on most of these reasons above, to recap — a Safe Harbor 401(k) is a great solution for any employer looking to:
- Avoid annual nondiscrimination testing: With a Safe Harbor plan, you can bypass the complicated and time-consuming nondiscrimination testing required for traditional 401(k) plans.
- Reap the tax benefits: A Safe Harbor 401(k) can provide tax advantages for both employers and employees.
- Boost employee participation: Because Safe Harbor plans require a match, they often encourage higher employee participation.
- Simplify administration: Safe Harbor plans have streamlined rules and requirements, reducing the administrative burden of managing a retirement benefit.
- Attract and retain talent: Offering a Safe Harbor 401(k) demonstrates a commitment to employees' financial well-being, making your company more attractive to potential hires and helping retain your most valuable talent.
¹ In general, Safe Harbor 401(k) plans automatically satisfy Top Heavy requirements. One exception is for plan years in which the employer makes discretionary contributions (such as profit sharing contributions) in addition to Safe Harbor contributions. Removing Safe Harbor contributions mid-year will also require plans be subject to all compliance testing. All plans of related entities must be administered by Guideline in order to provide compliance testing.
² Research insights based on data collected in May 2023, from a survey conducted by Guideline that consisted of 73 current customers (34 of whom had a Safe Harbor 401k plan) Though the survey is broad in scope, the experiences of the respondents in this survey may not be representative of all companies.
³ 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.
⁴ Source: Guideline Research as of June 2023
The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal and/or financial advice that considers all relevant facts and circumstances. You are advised to consult a qualified financial adviser or tax professional before relying on the information provided herein.