In the current work environment, we are seeing many employees leaving their positions to search for a better, more supportive workplace. While there are many reasons why an employee might be ready to move on from a company, not having a valuable retirement plan available is a major reason for many people.
A great retirement plan, such as a 401k, allows workers to have some assurance that they are investing in their future. Beyond that, it gives workers a sense that their employers are looking out for their employees’ best interests.
But 401k plans are complicated. For instance, they require paperwork to be filed on a regular basis, they must be monitored to ensure all of the information is up to date, and they are subject to yearly testing by the IRS to make sure all contributing members are being treated fairly.
However, passing the IRS tests can be done easily through the use of a Safe Harbor 401k.
How the IRS Tests 401k Plans for Fairness
Every year, there are three tests that businesses with 401k plans must pass. These tests are:
- The ADP Test. Those who make the most money within a company should not be able to invest significantly more into their account than those who make less. For this reason, the ADP (Actual Deferral Percentage) test places a maximum amount on the percentage of income that a high-earning employee can contribute to his or her fund.
- The ACP Test. When it comes to employer matching, all employees should be considered equally. Thus, the Actual Contribution Percentage test is implemented each year to ensure that employer matching contributions are proportional for both high-wage employees and lower-wage employees.
- The Top-Heavy Test. With regards to the total balance of the retirement plan, the most highly-compensated employees within a company cannot maintain more than 60% of the plan balance. If they do, the plan is Top-Heavy.
The logical question pertaining to these tests is: “What happens when a business fails?” Failing one or more of these tests is something to be avoided. Paperwork, time, and monetary penalties are the punishments for failing an IRS compliance test.
Safe Harbor Plans: How They Work
Safe harbor plans ensure that businesses automatically pass the IRS tests by insisting that 401k plans are maintained with matching contributions or non elective contributions for all employees, regardless of how much they make or contribute to their plans.
Can I Still Set Up a Safe Harbor Plan for 2021?
Sadly, for those that were hoping to start a new Safe Harbor 401k plan in 2021, the deadline of October 1st has passed. That being said, if you are simply hoping to add a Safe Harbor Provision to a plan that is already in place, you still have some time. The deadline for adding a Safe Harbor Provision is November 30th.
If you have questions or concerns about setting up a Safe Harbor plan for your company, representatives are standing by to take your call. Don’t delay, the deadline is fast approaching!
HR Future Staff Writer