Safe Harbor 401k
For many employers today, the so-called safe harbor 401k plan has become a preferred option for providing their employees with retirement vehicles. While these plans can be powerful ways to ensure employee financial security during the retirement years, it is important that everyone who uses them understands what they are and what they accomplish. Here is a look at the plan itself, as well as the advantages and disadvantages of this type of retirement planning option.
Though most people are at least somewhat familiar with standard 401k plans, they may not be as familiar with the safe harbor 401k. This plan is essentially the same as a normal 401k, with minor alterations. First of all, it bypasses the yearly benefit testing that other plans have to undergo by requiring a certain level of employer contributions. These contributions become fully vested as soon as they are made.
Thus, employers have the ability to match each employee’s contributions on a dollar by dollar basis, provided that the total contribution does not exceed three percent of that worker’s pay. Once it does, the employer contribution can only be half of the employee’s contribution until it reaches a total of five percent of that worker’s total wages. For employers who want to use an alternative contribution plan, there is also the option of making what is called a “non-elective” contribution that totals three percent of a worker’s compensation.
During the course of each year that the plan is in place, the employer must opt for one contribution method or the other if the plan is to maintain its safe harbor 401k status. Each plan details how contributions are made and when, with updates of that information provided to each employee on an annual basis. Under this plan, the employer locks himself into a minimum contribution amount for each employee covered.
When employer contributions become vested in the employee’s plan, that money can never be forfeited by that employee. Even if he or she leaves the company, those salary deferrals are his property, as are any investment return they have earned. This differs from the traditional plans, where vesting often takes place gradually over a period of several years.
The advantages to employers who offer these types of plans are obvious. Because the plan provides a superior level of benefit to employees, the employer will have an easier time attracting and retaining competent workers for his business. This is always an important concern for business owners who understand just how important competent workers are to their ability to compete in an ever more competitive marketplace.
By avoiding the testing requirements, safe harbor 401k plans allow a greater amount of money to be deferred toward retirement. This enables employees to maximize their retirement savings efforts, while also providing employers an opportunity to provide a superior benefit to their workers. This increase in contributions can be especially meaningful for those who are getting a late start on their retirement planning.
From a management standpoint, these plans are fairly easy to handle. Most have an automatic enrollment feature that enrolls each new worker as he or she becomes eligible. This helps the owner of the business to maintain his focus on the aspects of the company that yield profits rather than the day to day management of the benefit package. Obviously, this is an advantage that every business owner can appreciate.
Of course, there are also some features that some might consider to be disadvantages. One is the lack of flexibility that the employer enjoys where his own contributions are concerned. Because the requirements of these plans demand that either a standard or non-elective contribution be made, there is no way for the employer to avoid the minimum contribution. Many employers are reluctant to make that sort of commitment.
Moreover, the immediate vesting can be a cause for concern for some employers. Companies that utilize traditional plans can have at least some assurance that many employees will remain at the company to ensure that their contributions become fully vested. Because safe harbor plans immediately vest all employer contributions, some believe that this provides no incentive for the employee to continue his employment.
Overall, however, many people seem to find these plans a superior alternative to traditional retirement offerings. Because employers and employees can contribute more to the plans, and benefit testing is eliminated from consideration, employees feel that they have a greater opportunity to build their nest eggs. And since many employers find these programs easy to manage, safe harbor 401k plans will no doubt continue to be critical for retirement planning.