401k plans are intended to be fair for employees at all wage levels. If the most highly-compensated employees at a company put the lion’s share of money in the company’s 401k plan, the plan can become top-heavy and require costly corrections at year’s end, including some of the contributions for those employees having to be withdrawn. A top-heavy situation can happen to the most well-intended companies, even those offering a generous match.
The simple solution is to designate your company’s 401k plan as Safe Harbor. This can be done at startup time for a new 401k plan, or an existing 401k plan can be converted to Safe Harbor.
Safe Harbor 401k plans enable everyone at the company to make the maximum allowable contribution for their age, regardless of the contribution rates of fellow employees. In exchange for this flexibility there are two requirements the company will need to follow. The requirements are in the areas of vesting and company matching.
Safe Harbor Vesting
Safe Harbor 401k plans have no vesting schedule. Unlike 401k plans that have a graded or cliff vesting schedule, employees in Safe Harbor 401k plans are immediately and fully vested in their employer’s matching contributions.
Safe Harbor Matching Contributions
Employers have three choices for matching in Safe Harbor 401k plans.
Basic Matching: Make a dollar-for-dollar matching contribution up to the first 3% of the employee’s earnings, and a 50% match on the next 2%, for a total of 4% match on 5% deferral.
Enhanced Matching: Make a dollar-for-dollar matching contribution up to the first 4% of the employee’s earnings, not to exceed 6% which is the maximum allowed under Safe Harbor.
Non-Elective Contribution: Give all employees a 3% minimum contribution, including those that do not participate in the 401k plan.
To find out if a new Safe Harbor 401k plan is right for you, or if you should consider converting your existing 401k plan to Safe Harbor, simply call or email me today.