![]() ![]() Match 100% of an employee's contributions, up to 1% of their compensation, and match 50% of their contributions after that, up to a total of 6% of their compensation.Make a 3% non-elective contribution, or.The employer must choose one of the following: 4) Qualified automatic contribution arrangement (QACA)Įmployees are automatically enrolled to contribute 3% of their compensation to the 401(k) plan, but they can opt out. Under this option, an employer can provide a match that is at least as generous as the ones described in the first two options, but can be up to 6% of the employee's annual compensation. The analysis then compares the ratio of NHCEs to HCEs to see whether it is adequate. The ADP test looks at the elective deferrals of employees, combining it with their annual compensation to determine their actual deferral ratio (ADR). These non-discrimination tests are called actual deferral percentage (ADP) and actual contribution percentage (ACP) tests. ![]() Since safe harbor 401(k) plans are exempt from non-discrimination testing and top-heavy testing, Rixse says, "they're the easiest plan to administer and generally have the fewest administrative and legal headaches in the long run." How non-discrimination testing worksĮmployers that offer traditional 401(k) plans to their employees are obligated to perform annual non-discrimination tests, which are designed to ensure that HCEs do not receive an unfair amount of contributions relative to non-highly compensated employees (NHCEs). "For employers, a safe harbor 401(k) plan can ensure that all employees get treated equally when it comes to participating in the company's 401(k) plan and receiving employer matching contributions," says Chad Rixse, director of financial planning and wealth advisor at Forefront Wealth Partners. Further, companies with a smaller employee headcount that lose a single worker could potentially see a significant impact on contribution ratios. Small businesses, in particular, might want to use safe harbor 401(k) plans since they could face greater risk of failing non-discrimination testing. Note: Highly compensated employees, or HCEs, are individuals who either earned a certain amount from their employer in the previous year - for example, over $130,0 - or owned a stake of more than 5% in the business. Harnessing the immediate vesting and matching contributions offered by these plans as a means of recruiting potential employees. ![]() Avoiding fees that go along with managing a traditional retirement plan.Providing highly compensated employees with the largest deferrals possible.Eliminating the need to develop and follow a vesting schedule, since all employer contributions are fully vested as soon as they are made.Exempting them from tests to evaluate whether they have top-heavy status, a situation where key employees own more than 60% of the assets in a retirement plan.Reducing their compliance burden by eliminating the need to undergo annual non-discrimination testing.Safe harbor 401(k) plans can provide many benefits for employers, including: Further, employers offering these plans must adhere to certain notice requirements, which obligate them to give eligible employees information about the plan within a reasonable time frame. ![]() To qualify for this, a safe harbor 401(k) plan must supply employees with contributions that are fully vested at the time they are made. ![]()
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