Safe Harbor 401k Plans Create Opportunities for Business Owners

There are plenty of reasons why business owners shy away from offering a company 401(k) plan. Many feel their business isn’t large enough to make offering a 401(k) plan feasible and are intimidated by the costs, administrative responsibilities, and financial commitment.

The truth, however, is that every company should seriously consider putting a 401(k)-retirement plan into place. Let’s take a look at some of the reasons why.

1. Concerns Over Costs Are Often Unfounded

401(k) plans are now far more small-business friendly than they were in the past. Companies with only a handful of employees and even single-owner businesses can reap the benefits of a 401(k) without too much hassle or expense. Plan providers have recognized the need to offer services to smaller businesses and have created products that are surprisingly cost-competitive.

To implement a plan, you’ll usually pay an up-front fee and ongoing administrative or recordkeeping costs. In most cases, the total cost is less far less than you might expect.  Some businesses will qualify for a government tax credit to help further the costs of starting a retirement plan. Individual 401(k) plans offer even lower fees, although they do not qualify for the credit.

2. Great Retirement Benefits Help Attract Top Talent

With the current U.S. unemployment rate hovering at less than 4 percent, business owners now have to work harder than ever to attract and retain great employees. Showing your employees that you’re invested in them makes them more engaged and less likely to seek other opportunities. Having a retirement plan in place also makes you more competitive when seeking out qualified new hires.

3. Business Owners Need Retirement Savings, Too

Research shows that 47 percent of small business owners are contributing less than 10 percent of their income to retirement savings. A shocking 25 percent aren’t saving anything at all.  While many business owners plan to supplement their retirement with the sale of their business, this typically is not the best strategy. Systematically deferring funds to a retirement plan throughout your working years is a much safer option.

4. Matching Funds Isn’t Mandatory

One of the most common misconceptions surrounding 401(k) plans is that business owners are required to match employee contributions. The fact is that you have the option to choose whether you’ll offer a match or not. Some employers opt out of a match completely while others offer an annual profit sharing that is based on how the business performs each year.

Employers who choose to offer a match can set a vesting schedule that ranges from zero to four years. You have the flexibility to change your strategy throughout the life of the plan so you can choose what’s most appropriate for the state of your business at that particular time.

5. Safe Harbor 401(K) Plans Help Eliminate Common Problems

Under a Safe Harbor 401(k), the employer can defer as much of their salary into the plan up to the maximum levels.  The goal for every person should be to create a source of income at retirement, and this includes small business owners.  A Safe Harbor Plan aids in reducing the business owner’s tax liability while increasing their personal net worth, a win-win.

The government offers tax breaks to those who invest their money in a company retirement plan, but in doing so, it wants to ensure that all employees have an equal opportunity to benefit. This is why most plans are required to pass IRS-sponsored testing to prove they’re not discriminatory.

Failing these tests can result in major headaches and costly repercussions. Fortunately, Safe Harbor 401k plans eliminate this concern, creating more opportunities for businesses. The added safety and reduced administrative costs make Safe Harbor 401(k)s the most popular type of plan for small business owners.

Understanding the Details of the Safe Harbor 401(k)

In simple terms, the Safe Harbor 401k is a quid pro quo agreement whereby the IRS excuses you from testing requirements in exchange for your agreeing to encourage employee participation by making contributions to every employee’s 401(k) account.

This is an excellent option for employers who were already planning to contribute to employee accounts and don’t want to deal with the headache of annual testing. If you already have a 401(k) plan and have consistently failed these tests or are concerned about low employee participation rates, switching over to a Safe Harbor plan design can help eliminate these problems.

Matching Options

There are three basic matching options available in a Safe Harbor 401k plan. They are basic matching, enhanced matching, and non-elective contributions.

Basic Matching

Basic matching requires you to match 100 percent of the first three percent of an employee’s compensation and 50 percent of the next two percent of compensation. This means an employee who is contributing five percent of compensation would receive a four percent match. You are not required to match any contributions the employee makes in excess of five percent.

Enhanced Matching

Under the enhanced matching structure, employers are required to make a minimum match of 100 percent of the contributions an employee makes, up to four percent. Under this structure, an employee would only have to contribute four percent to receive a four percent match.

Non-Elective Contributions

Non-elective contributions are given to employees regardless of whether they contribute their own earnings to the plan. Employers must contribute a minimum of three percent of each employee’s compensation every year that this option is elected.

It’s important to remember that each of the guidelines above are minimum contribution levels.  Also, no matter which plan type you choose, any contributions you make are immediately 100 percent vested.

Let Us Help You Choose the Right Plan Design for Your Business Needs

There are now retirement plan options available to address almost every business-owner concern. If you’re still not sure about which plan is right for you, our plan consulting services can help. Contact us today so we can discuss your goals and help you design the perfect plan.