How Do I Set Up a Safe Harbor 401(k) Plan?

How Do I Set Up a Safe Harbor 401(k) Plan?

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Now that you’ve decided on which 401(k) plan is best for your business, it’s time to iron out the details of its implementation. Fortunately, the set-up of a Safe Harbor 401(k) plan is relatively simple compared to the Traditional 401(k), typically being a significantly more streamlined and cheaper process. To get your employees and stakeholders contributing to their retirement savings as soon as possible, follow this quick guide provided by Ubiquity, on how to correctly set up a Safe Harbor 401(k) plan.

Setting Up a New Safe Harbor Plan

By design, the vast majority of retirement plans are meant to start on January 1st. Why is this important? This intended start date influences all other deadlines that follow throughout the year. As you prepare to set up your new Safe Harbor plan, be mindful of these deadlines, outlined below:

  • Initiating a new plan: In general, you should have any new 401(k) plan set up by August 23rd. This step can take at least a week, and often exceeds this timeframe. Get in touch with a 401(k) plan provider as soon as possible to get the ball rolling quickly.
  • Adding the Safe Harbor provision: For brand-new plans, this must be done at least 90 days before December 31st. If you wish to add this provision, it is best to do so by October 1st. When you are ready, follow the steps below:
    1. Decide whether a Safe Harbor 401(k) suits your business. Under this plan, you will avoid specific IRS (Internal Revenue Service) tests, including the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests. Unlike a Traditional plan, however, you will be required to make contributions no matter what.
    2. Prepare a written plan. Alongside your 401(k) provider, you will need to write a notice to employees, file your documentation according to IRS deadlines, and determine specific provisions you need to be included in the plan.
    3. Select a funding option. Decide how you will provide the funds for your chosen plan. Speak with your 401(k) provider about the following options:
      • Roth contributions
      • Pre-tax contributions
      • Profit-sharing alternatives
      • Self-directed assets
    4. Commit to administration. Once all the details are ironed out, you can follow through with the implementation of your new Safe Harbor plan. This step is, perhaps, the most complex in the entire process, so be careful to carry this out with your provider. Failure to adhere to the law can result in severe legal and financial consequences, so it’s best to take your time with administration.
  • Changes to existing plans: Those who wish to add a Safe Harbor provision to existing plans must do so at least 30 days before the end of the year. You must also notify employees of the change within the same timeframe.

Benefits of the Safe Harbor Plan

The Safe Harbor plan is unique because it offers employers a way to avoid the ADP and ACP, as listed above, as well as the Top Heavy IRS test, and other such measures that impose limits on the contributions of Highly Compensated Employees (HCEs) and stakeholders. Additionally, you’ll experience unique tax deductions according to your chosen contribution structures.

There is a wide variety of advantages available to you when you choose the Safe Harbor 401(k) plan. To determine if this alternative is the right choice for your business, get in touch with a 401(k) plan provider today.

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