Business owners are always on the lookout for ways to save money. They’re also interested in retirement plans as a way to have a financially secure retirement when they no longer want to work. And if they have employees, they’re also interested in providing a way for them to save for retirement as well.
A good vehicle for retirement savings? A 401(k) plan. 401(k)s are the most popular retirement plans in the U.S. today. According to the Investment Company Institute, as of September 30, 2021, 401(k) plans held $7.3 trillion in assets for over 60 million active participants and millions of retirees and former employees in about 600,000 plans.
Why are 401(k) plans so popular? Why should a small business owner look at sponsoring one as part of their benefits package? Offering a 401(k) plan provides generous perks for employers and tax-deferred benefits for their employees. A 401(k) plan allows a business owner to save on personal taxes through tax-deferred contributions and if they qualify, they can take advantage of the business tax credits from the Setting Every Community Up for Retirement Enhancement Act (SECURE Act) to cover the cost.
401(k) plans are intended to benefit all employees, not just the owner or other highly paid employees. As a result, the Internal Revenue Code requires that employers perform annual Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) non-discrimination tests. If a plan fails either of these tests, the amount that highly compensated employees can defer is reduced or additional contributions must be made for the benefit of rank-and-file employees to keep the plan in good standing. In addition, if more than 60% of the assets belong to 5% owners and/or certain officers, minimum contributions are required to be made for the other employees, or highly compensated employees will be unable to make deferrals to the plan.
In order to avoid discrimination testing, an employer can adopt a Safe Harbor 401(k) plan. Safe Harbor 401(k)s are a lot like traditional 401(k) plans, but with some key differences. A Safe Harbor 401(k) plan requires guaranteed minimum company contributions. This allows the plan to sidestep non-discrimination testing.
Any size company can adopt a Safe Harbor 401(k) Plan, but they’re especially popular with small businesses (under 100 employees) that would otherwise have difficulty passing non-discrimination tests.
There are four types of Safe Harbor matching formulas. Business owners can choose which formula they want, providing them flexibility in having the plan design that best fits their needs and their budgets.
Safe Harbor 401(k) plans have lots of advantages, both to their plan sponsor/business owners and their employee participants including:
On the flip side, Safe Harbor 401(k) plans do have some disadvantages to the benefits above:
As with any qualified plan, your clients should know all their options so they can make the best choice in plan designs for them and their business. You’re their guide as they go through the decision and setup process.
The process for establishing a Safe Harbor 401(k) plan is the same as the process for establishing a traditional 401(k) plan. October 1 is the deadline for a 2022 Safe Harbor 401(k) plan to be operational. Setting up a new plan takes time, so it’s best not to wait until the last minute.
A Safe Harbor 401(k) plan offers real advantages over a traditional 401(k). Business owners need to assess their needs and how a Safe Harbor 401(k) can help them and their highly compensated employees’ squirrel away more retirement money than they could under a traditional 401(k).
In the end, though, many employers think the benefits of offering a Safe Harbor 401(k) plan more than outweigh the cost. There’s peace of mind at not having to worry about their plan failing its non-discrimination tests. Sponsoring a Safe Harbor 401(k) plan shows the owner cares about their employees’ retirement security resulting in more appreciative employees.
401(k) plans give business owners many ways to save and design their plan. Selecting a Safe Harbor design is very personal, taking into consideration the cost versus ultimate benefit to the owners and their employees. Wise business owners will work with an advisor to craft a plan that will help them meet their retirement savings goals, as well as the goals of their employees.
We in the Pension Division at RMC Group specialize in working with advisors who serve the small plan market. We can help you market, set up, and administer your clients’ Safe Harbor 401(k) plan.
Call 239-298-8210 or visit our website at rmcgp.com to discover how we can partner with you to help small business owners successfully set up and administer a Safe Harbor 401(k) plan that will maximize their savings and tax deductions.
The clock is ticking if you want to start a 401(k) Plan with a Safe Harbor design for a client. The deadline for having the plan operational is October 1, 2022, because employees must be given at least three months to make deferral contributions.
However, the deadline to start the process is just ahead – August 15th. That’s to allow time to draft the plan document and paperwork and to give employees the required 30-day notice that a plan is being installed.
