Safe harbor 401(k) plans are one of the most popular types of workplace retirement plans—and for good reason.

In this article, we’ll discuss how safe harbor plans work and the strategic advantages they offer, as well as practical steps to implement one effectively. Whether you're looking to simplify administration or enhance employee retention, understanding the nuances of safe harbor 401(k) plans is essential for making an informed decision.

Who Should Consider a Safe Harbor 401(k) Plan?

In a traditional 401(k) plan, nondiscrimination testing verifies that businesses don’t disproportionately favor their highly compensated employees. In other words, it confirms that the average contributions of highly paid employees, officers, and owners do not greatly exceed those of non-highly compensated employees.

Since safe harbor 401(k) plans automatically satisfy a number of these tests, they can be beneficial for businesses that may have trouble passing nondiscrimination testing.

Additionally, each offers its own unique benefits. For example, an enhanced safe harbor match may be a great choice for businesses with high turnover rates, as additional contributions can be a tool for employee retention. With a non-elective safe harbor plan, calculating employer contributions is straightforward since they are not dependent on employee elections, providing a streamlined contribution approach for businesses.

Steps to Set Up a Safe Harbor 401(k) Plan

Setting up a safe harbor 401(k) plan is simple. Here’s how:

1. Determine which type of safe harbor plan aligns most with your business needs and goals. There are four main contribution formulas for you to choose from. Vestwell can help you determine which type is most suitable for your situation. Click here to set up time with a specialist.
   • Qualified Automatic Contribution Arrangements (QACAs): Automatic enrollment is required, and employer contributions can be subject to up to a two-year vesting schedule.
   • Basic match: The employer matches 100% on the first 3% of deferred compensation and a 50% match on the next 2%, for a potential match total of 4%.
   • Enhanced match: The employer provides a match that is at least equal to what would have been made under a basic plan. A common formula is a 100% match on the first 4% of deferred compensation.
   • Non-elective: The company contributes 3% or more of each employee’s compensation, regardless of whether the employee also makes elective deferrals.
2. Choose a provider. It's important to find a qualified provider you can trust to offer guidance and help you manage your business's safe harbor 401(k) plan.
3. Set up a timeline for implementation. Taking action in the summer or early fall allows enough time to get your plan up and running while giving employees long enough to make elections before their first payroll.
4. Communicate the plan to employees and educate them about the benefits.

How Vestwell Simplifies the Setup and Management of Safe Harbor 401(k) Plans

Vestwell understands that every business has unique needs and goals––that’s why we provide employers with tailored support every step of the way.

• Optimized digital onboarding enables fast and efficient plan setup. Vestwell’s streamlined onboarding questionnaire is an in-portal solution for collecting your company’s information, in less than 10 minutes.
• Tools for easy communication and education for employees encourage plan participation and make plan management effortless. Vestwell’s Help Center provides step-by-step guides and resources for employees, so the answers to their questions are always just a few clicks away.
• Vestwell’s commitment to you includes ongoing support and compliance assistance. We’re here to walk you through each step of setting up and managing your safe harbor 401(k) plan to help your business maximize all of its benefits.

Important Deadlines for Setting Up a Safe Harbor 401(k) Plan with Vestwell

Safe harbor plans must be in effect three months prior to the plan year-end date. Therefore, eligible employees must be able to make salary deferrals starting no later than the first pay date on or following October 1.

If you would like to take advantage of safe harbor benefits but already have a different plan, you can always amend your offering.

Safe harbor plans require the employer to provide a notice to eligible employees informing them of their rights and certain benefits allotted under the plan. According to the IRS, these notices are considered timely if employers distribute them to employees at least 30 days (and no more than 90 days) before the beginning of each plan year.

Conclusion

There are many administrative, tax, and savings advantages available with safe harbor plans. Whether your business would benefit most from bypassing certain nondiscrimination tests or increasing employee retention, each type of safe harbor 401(k) plan provides unique opportunities to maximize your savings.

At Vestwell, we believe that every business deserves an individualized approach. If you’re interested in learning more about safe harbor plans and want to determine if it might be a good fit for your business, schedule a personalized consultation with us here.