HIGHLY COMPENSATED EMPLOYEES (HCEs)
- More than 5% owners including direct family members (spouse, children, parents)
- Employees who earn more than the annually specified limit
- The 2024 limit is employees who made over $150,000 in 2023
A Safe Harbor 401(k) plan allows owners and Highly Compensated Employees to maximize their retirement savings deferrals. This plan type eliminates the need for non-discrimination testing and Top Heavy Testing required in a Traditional 401(k) plan. However, Safe Harbor 401(k) plans require a specified employer contribution.
In a Safe Harbor 401(k) plan, the employer has the option to commit to either an employer matching contribution or employer non-elective (profit share) contribution and all contributions are 100% immediately vested.
The employer must make a 3% contribution to all eligible employees regardless of whether or not the employees are participating in the plan. This type of contribution can also be done with a “flexible” notice letting the employer decide each year whether or not they will make the contribution.
The basic Safe Harbor match formula is 100% of deferrals up to 3% of compensation and 50% of deferrals on the next 2% of compensation deferred. The maximum match is 4% of pay for anyone who defers 5% or more of their compensation. Employers may also elect to offer an Enhanced Safe Harbor Match up to 100% of deferrals not to exceed 6% of compensation deferred.
Safe Harbor Auto-Enrollment is a proactive approach to foster enhanced employee participation in 401(k) plans. Eligible employees are automatically enrolled at a pre-set contribution rate. Safe Harbor Auto-Enrollment includes automatic escalation, where the contribution rate increases incrementally over time. Employer contributions can have up to a 2-year cliff vesting schedule.
Employer Matching and Profit Sharing provides employers both design flexibility and discretion with respect to contributions. Employers are allowed to make additional Matching and Profit Sharing contributions to both Traditional and Safe Harbor 401(k) plans. Employer contributions are discretionary and can be allocated in a number of ways. Maximum employer deductions are limited to 25% of eligible compensation or the annual maximum contribution limit, whichever is less.
Matching is a great way to encourage employees to participate in the company’s retirement plan. Employer matching contributions can be made as either a discretionary or a fixed match formula. A discretionary match gives the employer the most flexibility regarding annual cost. A common match formula is $0.50 on the $1.00 up to 4%-6% of deferred employee compensation. Most companies design their match based on the company’s budget for employer contributions.
Employer Profit Sharing can be included in the design of the plan and Profit Sharing will be 100% at the discretion of the employer each year. The employer contribution can range between 0% to 25% of compensation for eligible employees. The maximum amount allowed is 25% of total eligible payroll and cannot exceed the annual IRS limit. Variety of ways to allocate profit sharing so this can be tailored to meet your specific company goals and budget.
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