Any business that provides a 401k option for their employees should be intimately familiar with the three IRS compliance tests that are conducted each year on all 401k plans.
However, what some such businesses do not know is that there is a provision, known as a safe harbor provision, that protects the company against any failures of these IRS tests.
In this article, we will review some of the top reasons why every small business should consider implementing a safe harbor plan to protect the business.
Safe Harbor 401k Plans are Easy to Start
Starting a new 401k plan with a safe harbor provision is as easy as picking up the phone and contacting a plan provider. The provider will walk through all of the necessary steps to completely understand what the responsibilities are.
It’s worth noting, however, that plans must be started by October 1st 2022 in order to be initiated for the following year.
If, however, you simply would like to add a safe harbor provision to the 401k plan that is already in place, the deadline extends out as far as November 30th 2022.
Safe Harbor Plans Help Pass the IRS Compliance Tests
The three tests conducted by the IRS annually include the Actual Deferral Percentage Test (ADP), the Actual Contribution Percentage Test (ACP), and the Top Heavy Test. Each of these tests looks at businesses’ 401k plans in a slightly different way, but all of them are implemented to ensure that those who earn the highest wages within a company are not benefiting unfairly from the company’s 401k plan as compared to lower wage earners.
Safe Harbor Plans Allow Choosing From a Few Options for Matching
The way that safe harbor plans work is that they force companies to match employee contributions. This can be done in a few different ways such as with basic or enhanced matching set ups. Additionally, companies may choose to implement nonelective contributions, which are contributions made to all employee plans, regardless of how much each employee has contributed themselves.
Safe Harbor Plans are Great for Small Businesses
For companies with less than 30 employees, safe harbor plans are an excellent choice. Unfortunately, these plans do come with a slightly added cost, as they are protecting the entity from the possibility of failing the aforementioned IRS tests. As companies grow in size, so does the cost of maintaining a safe harbor plan.
Therefore, depending on the size of the company, think carefully about whether or not a safe harbor plan is the right choice for the business.
Is a Safe Harbor Plan Right?
As with any business decision, there are many pros and cons to starting a safe harbor 401k plan. These plans can be an excellent choice for businesses, but they do come with added costs.
If the business has failed compliance tests in the past, or are worried you might fail them in the future, a safe harbor plan is definitely worth the extra cost. If you have questions, a plan provider would be happy to help cover this provision today.