Why now is the right time to open a Safe Harbor 401(k)
If you didn’t know (and you probably didn’t), July and August constitute “Safe Harbor season” for many 401(k) providers. That’s because Safe Harbor 401(k) plans are very popular and time-sensitive—Safe Harbor plans need to be set up and running by October 1 in order to meet IRS requirements.
Most years, businesses find the simplified plan management and savings boost to be compelling reasons to open a Safe Harbor 401(k). At Guideline, 69% of our plans are Safe Harbor plans.
But this isn’t most years.
Generally speaking, the best time to offer a retirement plan and to start saving for retirement, is as soon as possible. But with persistent market volatility and an uncertain economic outlook, is “right now” the right time to open a Safe Harbor 401(k)?
Safe Harbor plans in a nutshell
Safe Harbor 401(k) plans are a unique kind of 401(k) plan. They require companies to contribute a certain amount to their employees’ 401(k) accounts. But in exchange, these plans get “Safe Harbor status” and are exempt from some IRS nondiscrimination tests. They can also help owners and other highly compensated employees max out their personal contributions while helping employees save more.
401(k) plans are built for the long term
Right now is definitely a strange time for the global markets and economy. There’s a lot of uncertainty and no one knows when things will return to some sort of normalcy. But luckily for most of us, our retirement accounts aren’t too concerned with this strange year.
That’s because most employees save for decades, not just a few years. For them, a 401(k) plan is a long-term retirement strategy, so short-term market volatility shouldn’t have much of an effect. For employers, offering a 401(k) is also a long-term business strategy. Retirement plans can provide tax savings, as well as strengthen employee retention and talent acquisition. And as an added bonus, when you put away money in a down market there is more room for growth in the long run.
Why Safe Harbor? And why now?
As we mentioned earlier, Safe Harbor plans exempt companies from some IRS nondiscrimination testing and the consequences of failure. That means your company wouldn’t have to potentially make corrections to the plan by refunding 401(k) savings and/or making post-year employer contributions. And a Safe Harbor match is preferred by many companies, because it incentivizes their employees to save, while also potentially giving them an extra bump in savings.
In general, Safe Harbor plans are a good choice for companies that fit any of these profiles:
- Plan to match employee contributions anyway
- Worry about passing ADP, ACP, or Top-Heavy tests
- Have previously failed one of those tests
- Have low participation among rank and file employees
- Care deeply for all of their employees
If you would be a good candidate for a Safe Harbor plan at any other time, you’re a good candidate for it now.
Workplace benefits are still highly coveted, employees still need to save for retirement, and the IRS will still be requiring nondiscrimination tests.
With mandatory company contributions, there is an added cost to offering a Safe Harbor 401(k). And in today’s economic climate, that’s definitely something to think about.
But many business owners find the upside outweighs these costs. Offering a Safe Harbor 401(k) can help your business, your employees, and your personal retirement savings—today and in the future.