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What Are The Best Safe Harbor Contributions?

Safe Harbor

The Safe Harbor plan is one of the best 401K options for small business owners who want to maximize their employees’ contributions while still complying with IRS restrictions and standards. Another one of this plan’s most notable characteristics is that you can legally bypass a few IRS compliance testing standards, keeping administration as hassle-free as possible. Yet, where you truly get the most out of this alternative is with the contribution options available to you. To learn more about which Safe Harbor contribution would be best for your company, see the guide below.

Types of Matching Options with Safe Harbor 401K Plans

There are three distinct types of Safe Harbor 401K matching alternatives:

  • Basic Match: Your company will match employee contributions 100%, dollar-for-dollar on the first 3% of deferred funds. Business owners will also have the option to match 50% on the next 2-5% of deferrals.
  • Enhanced Match: Your company will provide a 100% match to employee contributions for 4-6% of deferred funds.
  • Nonelective Contributions: For eligible employees that do not wish to participate in the plan, your company will contribute 3% of their gross pay.

Those who choose to participate in the plan are required to be 100% vested. Just like any other 401K, the Safe Harbor plan follows the limitations below:

  • Those younger than 50 years old can contribute up to $19,500.
  • Participants older than 50 years old can contribute a maximum of $26,000.
  • The collective contribution allowance for younger employees is $57,000, and $63,000 for older participants.

Advantages of Safe Harbor 401K Plan Contributions

Safe Harbor 401K plans offer a wide range of highly flexible contribution types that allow employees to maximize their retirement savings, and business owners to simplify their matching standards. The types of Safe Harbor contributions available are best suited for:

  • Small businesses, especially those with employees who do not wish to participate. Unlike other retirement savings plans, HCEs (Highly Compensated Employees) can still reap the maximum benefits of your plan, even if their coworkers are not interested in participating. You will still pass IRS compliance tests, even if you incorporate a profit-sharing component to bolster the plan’s benefits further.

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  • Businesses that have struggled with past IRS nondiscrimination testing: Due to the flexibility provided to you by Safe Harbor provisions, your employees will be allowed to participate (or not) in several different capacities. Though this would usually be a point of concern for other kinds of 401K plans, with Safe Harbor, you won’t need to worry about potential refunds, administrative challenges, or penalties.
  • Businesses that have a top-heavy 401K plan. If only business owners, executives, and other highly-compensated individuals are expected to hold most of the plan’s total assets, then your employees can still maximize their contributions. You won’t have to worry about a penalty.

Your costs will differ based on the contribution plan you choose. You can use the following formula to estimate the annual expenses related to your Safe Harbor plan:

Total Expenses = (Total Number of Employees) x (Percentage of Participating Employees) x (Your Employees’ Average Salary) x (The Percentage You Will Match)

For example, assuming an average salary of $50,000 per employees (of which there are 40 total with a 60% participation rate), you would be contributing $48,000 annually with the minimum matching on an Enhanced plan. To determine if this or another matching structure would be suitable for you, get in touch with a 401K plan provider today.