![]() (Please note, although the total expense is lower and the employee has to defer more of their pay in order to receive more match, the auto-enrollment part of this shouldn’t be overlooked. Total expense to the employer is 3.5% if the employee puts in 6%. This is typically referred to as a “Safe Harbor Auto-Enrollment.” That is because it combines the component of auto-enrollment (if your employees don’t “opt-out” from being enrolled into the plan, then they will be automatically enrolled).įormula – Match 100% up to 1% and 50% after up to 6%. Qualified Automatic Contribution Arrangement (QACA) Again, 4% is the maximum employer match.Īny employer matching contribution is 100% vested. If you selected Enhanced Safe Harbor 4%, an employee paid $1,000 and wanting to contribute 4% of pay, which is $40, would receive a match of $40. You would have to pick one of these formulas, you couldn’t switch between them. This is considered a very rich employer match for your employees.įormula – Match 100% up to 4% OR 5% OR 6% of employee deferred pay. That means, once it goes into the employee’s 401(k) account, it is theirs. As an employer using this Safe Harbor you would match 4% (max), and it would be $40 in this example.Īny employer matching contribution is 100% vested. – An employee is paid $1,000 on a pay check and wants to put in 5% of pay. Total expense is 4% if an employee puts in 5% or more. Essentially, you only match what is deferred into the 401(k) plan by employees participating.įormula – Match 100% up to 3% of employee deferred pay and 50% after up to 5%. This is the lowest cost Safe Harbor if you don’t add an auto-enrollment. Let’s go through each one of these so you can understand how they work and more fully know the options and costs. Safe Harbor Non-Elective (Profit-Sharing).Qualified Automatic Contribution Arrangement (QACA) – “Safe Harbor Auto-Enrollment”.What are your options for Safe Harbor? Here are the different Safe Harbor options by name: ![]() So, if you fail any or both of those tests, you’re exempt from the results if you are Safe Harbor. The biggest perk to having this Safe Harbor provision is that it gives you an exemption from the tests previously mentioned. Now that we have the confusing testing portion out of the way, let’s look at the Safe Harbor option and why they are great for a small business.Ī Safe Harbor 401(k) Plan is one in which you, as the employer, agree to using a certain formula to match or provide contributions to your employees that participate in the plan. If the total 401(k) plan assets are $200,000, and $122,000 (61%) of those total assets are key employee assets, then it is a Top Heavy failure. More info can be found in this article HERE. If at the end of the year the total 401(k) plan balance (everyone) has over 60% from these key employees (executives, owners, etc.), then the plan fails the Top Heavy test and would have to make a contribution up to 3% to all non-key employees (this could even include some of those highly compensated employees) in any year afterward that those key employees make contributions. The Top Heavy test looks at those “key” employees, which are your executives and owners. It isn’t exactly this cut-and-dry, but I think you should know that possible refund or mandatory contribution is required if this test is failed. OR you can make an employer contribution to all employees that are not highly compensated. The result? There would need to be a refund of some (perhaps all) contributions made by those highly compensated employees (this includes owners regardless of pay). The 2% threshold would mean the highly paid and ownership group couldn’t exceed 6% for their average. If the average of the highly paid employees and/or owners is 8%, while those staff employees is 4%, the plan would fail this test. If the participation from the highly compensated employees exceeds a certain percentage of those staff employees, we’ll say by 2%, this test will fail. ![]() ![]() This test then compares the average contribution by these highly paid individuals to those that don’t fit that criteria (we’ll refer to those as “staff employees”). The ADP/ACP looks at all those highly compensated employees (anyone that earned over $125,000 in 2019 would be considered highly compensated) and/or has over 5% ownership in the company. I’ll only provide a short summary here for these tests to give you perspective.ĪDP/ACP – Average Employee Deferrals/Employer Contributions
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