When considering the plan design for your retirement plan, there are a multitude of important decisions to make. One of the decisions may be whether to consider making your plan safe harbor. A safe harbor plan is one that bypasses annual non-discrimination testing and thus eliminates the risk of having to take corrective measures for a failed test. To be considered a safe harbor plan, there are a few requirements that must be implemented into your plan design such as mandatory employer match and immediate vesting of any employer contributions. If you are considering a safe harbor plan, the below formulas qualify as options for your match calculation.
Safe Harbor Matching Formulas
1. Basic Match:
The Plan Sponsor will match dollar for dollar (100%) up to 3% of deferred compensation, and 50% on the next 2% of deferred compensation for a total possible match of 4%.
2. Enhanced Match
The Plan Sponsor will match dollar for dollar (100%) up to 4% of deferred compensation.
3. Non-Elective Contribution
The Plan Sponsor will contribute at least 3% of each eligible employee’s compensation to their retirement account, regardless of their deferrals, meaning even those who are not contributing would receive the benefit.
4. Qualified Automatic Contribution Arrangement (QACA)
The Plan Sponsor will match dollar for dollar (100%) up to 1% of deferred compensation, and 50% on the next 5% for a total possible match of 3.5%. A QACA plan must also implement auto-enrollment and auto-escalation. Match dollars from a QACA formula also have the option of implementing a 2-year cliff vesting schedule. There are certainly more considerations with this option.
Benefits of Safe Harbor
There are several added benefits to choosing to adopt a safe harbor plan. Consider some of the below points when choosing safe harbor.
Elimination of failed non-discrimination risk. When a plan is safe harbor, they automatically pass annual testing and avoid refunds to highly compensated employees.
Safe harbor matches can be an incentive to attract and retain talent. In an economy with a tight labor market, added employee benefits like guaranteed matches with immediate vesting can be huge recruitment tools.
Disadvantages of Safe Harbor
As with anything, there could also be disadvantages to choosing a safe harbor plan. Below are some points that should be considered.
Being safe harbor is generally a year-long commitment, meaning the employer contribution must be guaranteed throughout the year. In most cases, moving away from safe harbor can only be done annually.
Employer match contributions can be expensive. Consider the business cash-flow implications when deciding which match formula to leverage.
Safe harbor contributions require immediate vesting, aside from the QACA formula. For companies with high employee turnover, this may not be ideal.
Conclusion
Ultimately, a safe harbor plan may be a worthwhile implementation for your retirement plan. However, time should be taken to figure out if it is affordable and suitable to your goals as a plan sponsor. If you are considering implementing safe harbor status, consult your recordkeeper, plan advisor, or even ERISA counsel if necessary.
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