Learn How To Calculate Safe Harbor Employee and Employer Contributions.
Safe Harbor 401(k) Plans Explained
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and require costly corrections at year’s end, including some of the contributions for those employees having to be withdrawn.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 see how Basic and Enhanced matching work, simply look at the chart above displaying scenarios for an employee earning $100,000 per year. The chart takes into account the maximum allowable contributions for persons under age 50 and persons age 50 and above. Once you understand the principles of Safe Harbor, you can chart your own numbers for a single paycheck or an entire year.
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.