The Safe Harbor 401(k): Designed to reduce the administrative hassle for small businesses

Before the pandemic, 80 million individuals did not have access to a retirement savings option, and 43% of employers did not offer one. A vast majority of small to midsize businesses do not offer retirement plans due to the cost, administrative burden, or lack of employee interest, but 68% of independent savers would participate in a workplace retirement plan if they had access.

As we take strides towards a post-pandemic world, many employees are prioritizing their need for benefits in the workplace. As my colleague Andrew Meadows previously discussed, we are in an employee’s market, where workers can pick and choose the job opportunity that’s right for them based on their goals, compensation needs, and benefits. Offering perks that employees want and need is a foolproof way to attract and retain top talent.

Related: Setting up a 401(k) & profit-sharing plan for small businesses

At the same time, as a business owner, it’s important to choose the right retirement plan for your employees. While there are many options to utilize when helping employees save for a secure retirement, a Safe Harbor 401(k) can help small business owners reward their employees while simultaneously saving themselves from administrative burdens. At its core, Safe Harbor is a way of structuring a 401(k) plan to save for retirement with pre-tax income, and allows small business owners to maximize their contributions while sailing safely through annual IRS-mandated compliance tests. Below, I’ve outlined three reasons to consider the Safe Harbor 401(k) plan.

1. The ability to maximize retirement plan contributions: Under this plan, business owners are required to make a minimum contribution each year, which must be immediately 100% vested. There are multiple contribution options to consider. First, through a basic match, the employer matches 100% of each employee’s 401(k) contributions, up to 3% of their annual compensation, plus a 50% match of the next 2% of their contributions. Through an enhanced match, the business matches 100% of each employee’s 401(k) contributions, up to 4% of their annual compensation. Lastly, a non-elective contribution can be utilized, where the business matches at least 3% of every employee’s salary, regardless of participation in the plan. All options are a great way to encourage employee participation.
2. Easy IRS compliance testing: While there are several ways to avoid nondiscrimination rules, Safe Harbor 401(k) plans are the easiest way to reduce the administrative hassle. This plan is designed to sail through two of the three IRS-required nondiscrimination tests, which aim to prove the business is not providing more significant benefits to highly-compensated employees compared to the rest of the employees. Businesses that fail the required testing must promptly make expensive corrections. Those unable to make changes before the deadline are faced with a 10% penalty.
3. Tax credits: 401(k) plans can receive up to $16,500 in tax credits over three years to offset administrative expenses such as cost write-offs and employee education. Under this plan, employers can receive additional tax savings for every contribution made on behalf of the employee by deducting them from their corporate taxes as business expenses.

Any competitive benefits package today includes a retirement plan because it is an indispensable tool used to attract and retain top-tier talent. At a time when many Americans are being forced to put savings on the back burner, as small business owners, it’s essential to continue providing employees with support in creating a secure retirement, while also lessening administrative burdens in order to focus on what matters most to your business.

Chad Parks, Founder and CEO of Ubiquity Retirement + Savings, is a nationally recognized, go-to expert on retirement. His firm has helped more than 10,000 businesses contribute over $3 billion toward retirement savings since 1999.