What Safe Harbor 401k Does for Your Business


When deciding on joining a company or continuing to work for a company, many employees will heavily consider the retirement plan. Companies who offer excellent retirement benefits to employees can generally expect that their workers will stay on longer than those who work at companies who don’t offer compelling retirement options.

That being said, it is critical that businesses understand exactly what is required with regards to a 401k plan from an administrative perspective. There are certain considerations and timelines that need to be kept in mind. Otherwise, serious consequences can result.

Fortunately, Safe Harbor 401k plans can protect businesses from compliance issues related to retirement plans.

What is a Safe Harbor 401k Plan?

Each year, the IRS runs three tests on businesses that provide 401ks for their workers. Essentially, these tests are administered in order to determine whether or not businesses are unfairly favoring workers who earn more within a company, as compared to workers who earn less.

The three IRS tests are as follows:

1.The ADP Test.

The Actual Deferral Percentage test is, as the name suggests, a test that deals with the amount of money deferred into employees’ retirement accounts. Specifically, the test looks at the percentage of salary that highly paid employees invest in their accounts as compared to how much lower-wage employees defer into their accounts.

If there is a huge discrepancy in this area, the business would fail the first of the three IRS tests.

2. The ACP Test.

 The Actual Contribution Percentage test ensures that employers do not unfairly match higher wage earners contributions. Also, the test makes sure that these employees do not contribute significantly more to their accounts in comparison to the amount contributed by those who earn less.

If a company does not meet these requirements, they fail the second of the three IRS tests.

3. The Top Heavy Test.

Last but not least, the Top Heavy Test examines plan balance. Specifically, top earners and the business owner within a company cannot hold more than 60% of the money within the total retirement plan.

If a company doesn’t follow this rule, they fail the third of the three IRS tests.

Failing one or more of these tests is not something any business should ever have to deal with. The corrective process requires copious amounts of paperwork and fines that can create a huge headache for a business.

How Safe Harbor Plans Help Businesses Bypass the IRS Tests

By using a Safe Harbor plan, businesses automatically ensure that they pass the IRS tests. These plans are structured in such a way that it is impossible for businesses to fail the tests. Therefore, there is no stress at all about whether or not you’ll be fined and impacted by not being compliant with the IRS rules!

If you want to set up a new Safe Harbor 401k plan, be sure to do so by October 1st 2022. However, if you simply want to add a Safe Harbor provision to your current plan, you have until November 30th 2022.

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