Maximizing Employee Retention With Safe Harbor 401k Plans

Employers must understand that several factors go into employee retention. The basics include a wage worthy of sacrifice and a competitive compensation package, but benefits like health insurance and flexible work schedules are also significant. Finally, providing a culture where employees want to work is critical. Companies with high turnover rates must focus on reducing reasons for leaving and preemptively developing opportunities to retain staff.

Tax-Free Savings

Offering a company-matched safe harbor 401k plan is an effective way to attract and retain top talent. This popular benefit enables employees to save for retirement without paying taxes on those contributions until they retire or leave their jobs. With an essential, safe harbor match, your business matches up to 4% of employee pay in tiers: 100% on the first 3% employees defer, then 50% on the next 2% of pay they contribute. This is an excellent option for companies on a budget that expect low participation.

If you choose an enhanced safe harbor plan, your business will make additional non-elective contributions equal to 3% of eligible employees’ wages, regardless of whether they participate. The improved plan will allow owners and highly compensated employees (HCEs) to maximize their salary deferrals. This type of plan will still require you to pass compliance testing, but it’s much simpler than a traditional 401(k) that fails the tests and requires you to refund or return excessive employer contributions to HCEs. It also avoids costly penalties and other fees associated with failed testing.

Increased Savings

Incentives to save with a safe harbor plan are a great way to motivate employees. Employers typically match the first 3%-6% of employee contributions to their plans – a significant incentive for employees to start saving. The essential, safe harbor match helps drive participation but can be costly for businesses with low plan participation. The Enhanced Safe Harbor match offers a higher employer contribution and is less expensive for companies with high participation rates.

Traditional 401(k) plans must pass annual compliance tests (IRS annual nondiscrimination testing) to ensure that highly compensated employees are not disproportionately benefiting from the employer’s contribution. If the plan fails these tests, the business must either refund the money or make additional contributions to employees to rectify the problem.

The good news is that the mandatory employer contribution required by a safe harbor plan automatically passes these annual testing requirements. This alleviates a huge burden and expense for small businesses and allows owners to contribute much more to their accounts and the accounts of their top executives and other high earners without worrying about violating IRS regulations. In addition, employer contributions under a safe harbor plan immediately vest – another advantage for attracting and retaining employees.

Increased Employer Contributions

An employer who wants to encourage all employees to save for retirement can offer a non-elective Safe Harbor plan. The company will automatically contribute 3% of each employee’s salary to their account in this plan. This will be tax-deductible for the company, and employees can defer any taxes on these contributions until they are withdrawn in retirement.

A more common type of safe harbor plan is an enhanced match. With this plan, the company will match 100% on the first 3% of each employee’s contribution and 50% on the next 2%. This is an excellent incentive for employees to start saving and can help them reach their maximum 401k contribution limit more quickly.

These plans also avoid annual nondiscrimination testing, a significant benefit for small businesses. This allows highly compensated employees (HCEs) and owners to contribute more than they would with traditional 401k plans subject to top-heavy tests. This can be a great way to reward top performers without the risk of failing IRS compliance testing and incurring additional costs.

Enhanced Recruitment

Offering a competitive retirement plan is one of the best ways to attract and retain top talent. As a result, 401(k) plans are becoming increasingly important in the recruiting process. A 401(k) with safe harbor features can help your business stand out from competitors who may need help to offer the same benefits.

A key advantage of safe harbor plans is that they bypass annual compliance testing for employer matching and non-elective contributions. This can save you time and money on administrative costs.

Safe harbor plans can also be more cost-effective for small and mid-sized businesses because of their streamlined rules and requirements. However, these plans are not flexible when implementing changes and have limited vesting options.

Lastly, the cost of safe harbor non-elective contributions can add up quickly and increase payroll expenses. They also require immediate vesting, which can limit employee retention. Therefore, you should consider the pros and cons of safe harbor plans before implementing one for your business.

No Annual Nondiscrimination Testing

For some business owners, the annual compliance testing required for 401(k) plans can be daunting. Many choose to add a Safe Harbor feature to their plan to avoid failing tests (which can result in expensive corrections and administrative work). A Safe Harbor non-elective plan automatically passes the three critical annual IRS compliance tests otherwise applicable to traditional 401(k) plans. This alleviates a significant administrative burden and helps save time and money for the company. In addition, since safe harbor plans are exempt from the annual nondiscrimination testing, employers and highly compensated employees can contribute more to their 401(k) accounts because they will not have to worry about failing the tests. This can also help attract and retain top talent, as attractive employer contributions increase the perceived value of the job offer.