Why Consider a Safe Harbor Plan?
Is your 401(k) plan a safe harbor plan or not? There are pros and cons of having a safe harbor plan. One of the most significant benefits of safe harbor plans is automatically passing some compliance testing requirements. These benefits can be helpful when you have high-income-earning employees within your company or owners who want to invest a significant contribution into their accounts. Generally, the owners and high-income earners are most affected by the nondiscrimination testing. Some plans with no safe harbor election leave high-income earners and owners receiving contribution refunds for failed testing.
Generally, traditional safe harbor plans can fall into one of three types:
- Basic Safe Harbor Match
- Enhanced Safe Harbor Match
- Nonelective Safe Harbor Match
Basic Safe Harbor Match
For a basic safe harbor match, the employer matches 100% on the 1st 3% of the employee's contribution and 50% for the next 2%. This type of match requires employees to have a little more skin in the game. Employees would have to contribute 5% of their income to get the full 4% match from their employer.
Enhanced Safe Harbor Match
An enhanced safe harbor match is pretty simple. It's nothing more than a dollar-for-dollar match up to the 1st 4%. In other words, an employee only needs to contribute 4% to get the full employer match of 4%.
Nonelective Safe Harbor Match
A nonelective match is simply the employer contributing 3% to all eligible employees regardless of their contribution.
Qualified Automatic Contribution Arrangement (QACA )
Another type of safe harbor plan is a QACA plan. In these plans, there is an automatic enrollment feature. These plans fall into two categories.
- A 1% match on the first 1% and then 50% match after that up to 6%. In other words, if an employee contributes 6%, the total matching contribution the employer gives would be 3.5%.
- Another way A QACA matches done is with a nonelective 3% regardless of employee deferral.
Unlike a basic or enhanced safe harbor match, QACA structures allow for a vesting schedule. This vesting schedule can be up to a two-year cliff vesting. Keep in mind that the QACA plan structure can be a little more complicated to administer.
This article scratches the surface on Safe Harbor plans and doesn't go through all the benefits and trad-offs these plans offer. Also, keep in mind that there may be restrictions on when you can adopt a safe harbor plan. In addition to all this, certain disclosures must accompany safe harbor plans. In short, if you are looking at adopting a safe harbor plan, talk to an advisor with 401k experience to learn more. We'd love to give you a second option.