Once you’ve decided that a Safe Harbor 401(k) is the way to go, you have a few different options to weigh.
Basic Matching
With the Basic formula, you provide a 100% “dollar for dollar” match on the first 3% of compensation contributed by employees, plus a 50% match on the next 2% contributed.
- Pro: Employees must actively participate in the plan and put money toward their retirement to benefit
- Con: Since the match is based on contributions, employer funding costs will fluctuate
- Con: You still have to make sure you can pass the top-heavy test
Enhanced Matching
With the Enhanced formula, you provide a 100% “dollar for dollar” match on contributions from 4-6% of compensation contributed by employees.
- Pro: Employees are encouraged to save aggressively for their retirement. They must invest to receive
- Con: Again, employer costs vary from year to year, depending on employee savings
- Con: There is no guarantee you’ll pass the top-heavy test
Non-elective Contribution
With the Non-Elective formula, you commit to a mandatory contribution of at least 3% of total compensation for all employees that meet the plan’s eligibility rules, regardless of whether or not they contribute to the plan.
- Pro: All employees benefit from the retirement plan, whether they choose to save or not
- Pro: The costs are at a fixed rate from year to year, which makes budgeting and planning easier
- Pro: Owners and HCEs have the potential to maximize their employee/employer contributions
- Con: Costs can be higher, considering all eligible employees receive maximum contributions
Is a Safe Harbor Plan for Your Small Business?
You should consider a Safe Harbor plan for your small business if you want to take care of your employees as a matter of good business principles or if you want to adopt a match program that is truly competitive. Maybe you’ve had a plan that has failed nondiscrimination testing in the past and you’d rather bypass the whole ordeal, or you currently have a low retirement savings participation rate you’d like to boost. Contact Ubiquity to learn more about the Safe Harbor 401(k), as well as alternatives like traditional 401(k) plans and Solo 401(k)s. If you have an existing plan, you can add a Safe Harbor provision by contacting us, too.
