Name: The Power of a Safe Harbor 401(k)
Uploaded: 2026-05-20T18:43:10.567Z
Duration: 24 min 42 s
Description: The Power of a Safe Harbor 401(k)

Transcript for "The Power of a Safe Harbor 401(k)": To today's presentation, the power of safe harbor four zero one k. Before we get started, let's review a brief a few brief housekeeping items. To access helpful resources related to today's content, including a copy of the slide deck you can download and print, you'll want to click on the docs column at the right of the console. You'll also see a column titled q and a. And if you have questions during the webinar, just type yours in and click submit. We have a few team members in the back end helping to provide answers privately. While we can't guarantee a response to every question, please note that all questions are received and help us create resources that strengthen your business. Occasionally, you may see an audience poll or two as we go through the presentation. Our new platform, when the poll opens, a blue alert card will briefly appear at the lower left of your cell, while the poll column tab opens at the right, marked with a red dot. Click on the polls tab to view the question, mark your response, and when you click submit, you'll receive a confirmation message. Please note, this presentation does not constitute legal advice and is for informational purposes only. And now I'd like to introduce our speakers. Brian Feeney decades of experience to Paychex. During his five years on the retirement team, he has shared his retirement expertise with more than 5,000 small businesses and has received the inner circle of excellence award four years in a row. Brian specializes in helping business owners utilize payroll and retirement strategies to optimize tax benefits. Zach, our other presenter, with more than fifteen years experience in retirement plan compliance industry, Zach Keep is familiar with the particulars of ERISA and non ERISA four zero one k, four zero three b, and four fifty seven plans, and he holds a QKA designation from ASPPA. As retirement compliance manager at Paychex, he works with a team of four retirement analysts, boasting a combination of six day decades of compliance experience. In addition, Zach manages a team of analysts who support the increasingly complex privacy, telephony, and AI compliance world. Our agenda. So as we're getting started today, we introduce you to the q and a column on your console. We'll be covering some terms that may be unfamiliar to you, and we will do our best to define them as we go. However, if we miss one or if we go a little too fast, please feel free to ask us about it in the q and I column. One of our fantastic retirements compliance partners is behind the scenes to answer those questions. As I stated that again, now let's dive into our agenda. So today's agenda is safe harbor basics, the nondiscrimination testing and HCEs, business benefits, safe harbor versus four zero one k's, types of plans and contribution matches, and important deadlines. With that, Zach has joined me on stage, and I think he's ready to start going. Zach? Okay. Thank you so much, Stephanie. It's a pleasure to be here today. And, we are going to, it's good, I think, that Stephanie was talking about 403B, 457, all the different retirement plans because, gang, I am here to tell you that I plan on hitting everyone with a lot of acronyms as we, go through our conversation about safe harbor four zero one k plans. You know, safe harbor in general is a very simple concept. What it does, more importantly, maybe what it's designed to help plan sponsors and employers avoid, conceptually, simple. But there is a lot that goes on behind the scenes. So without further ado, why don't we kinda jump in right at the beginning, and we'll get started with that alphabet soup. What exactly is a safe harbor four zero one k? Well, as the name implies, it provides a little bit of safety, a little bit of simplicity to a plan sponsor. It is a really, it's it's a provision of four zero one k. K. It is something that allows that plan to be exempt from most nondiscrimination testing. Now we'll go into nondiscrimination testing in detail in a couple slides, but spoiler alert, nondiscrimination testing is not the most straightforward concept. There's a lot that a plan sponsor needs to do and some ways, frankly, that it can go wrong. So a safe harbor four zero one k is really, in many senses, a way of avoiding some of the most administratively complex aspects of plan administration. In other words, the things that cause a little bit of discomfort, the things that expose a plan sponsor to a little bit of risk, and, again, a little bit of a spoiler, but the things that can lead to some awfully awkward conversations with, some of the decision makers in, in your employer. So a safe harbor four zero one k is a way for a plan sponsor to get around that. A safe harbor plan is actually automatically deemed to satisfy nondiscrimination testing. It offers that administrative simplicity, but it does also mean some other things. I think for a lot of employers, the biggest difference is that when you have a safe harbor plan, you must offer an employer contribution, and that's something that's a little bit different. With a a non safe harbor plan, there can be more flexibility. That's gonna be the theme today. Safety versus flexibility. Those non safe harbor plans do allow flexibility for things like employer contributions, not so with safe harbor. But in exchange, you get freedom from some compliance work. I think that's the big takeaway if you take nothing else from this presentation today. So we now know a safe harbor plan freeze employers from the administrative work of nondiscrimination testing. But what is nondiscrimination testing? Here is where we're gonna start getting into alphabet soup as promised. Non discrimination testing is really an umbrella term, if you will. It refers to a couple of very well known, very famous, maybe infamous tests that a plan needs to satisfy every single year. There's what's called the ADP and the ACP test, the actual deferral percentage, actual contribution percentage test. These tests are conducted every single year. And there's some math that goes on behind the scenes. Compliance nerds like me at some point in our career have had to do ADP and ACP testing long hand. We've actually had to do it with paper and pencil just to prove that we can. I was very happy that I could start relying on a computer to do that once I prove that I could do it long hand. These days, I hope I don't need to do it long hand ever again. The reason why I say that is even with the very smallest plans, even when we have maybe five, six, 10 participants in the plan, the ADP and the ACP test can get complex. And what are these tests looking at? They're really designed to ensure that four zero one k plans don't discriminate against rank and file employees. In other words, I really think this is a little bit of, of an artifact from when four zero one k plans were initially conceived of now many decades ago. You know, these were designed to be sort of supplementary to a pension. Four zero one k has evolved a lot over the years. It's become many new things. It's become many things to many people. It's retirement. It's college savings. Depending on who you ask, it can even be an ATM with hardship distributions and loans. The four zero one k originally was really a supplementary plan, though. And I think that's sort of where ADP and ACP had their genesis. The goal was to make sure that this benefit wasn't just benefiting the business owners, wasn't just benefiting what we call highly compensated employees. And to make sure of that, what happened was the ADP and the ACP were designed to make sure that the balance of contributing participants wasn't inordinately weighted towards, let's say, the the higher end of the career ladder. Also, made sure that the savings rate wasn't inordinately weighted towards the higher end of the career ladder. And who's on the higher end of the career ladder is the next question. If we offer a non safe harbor plan and we are obligated to do this testing every year, well, who's who? Where is the dividing line? That's a great question. The dividing line is defined by none other than uncle Sam himself. There are individuals who are called highly compensated employees. These are the folks who are not we think back to last slide, who are not rank and file employees. These are the decision makers, the owners in many cases, or individuals who receive a very high degree of compensation. So when doing those tests, when making the the scales, so to speak, we have highly compensated employees on one side and non highly compensated employees on the other side. Now, unfortunately, an HCE, again, yet another acronym, is not just a compensation question. What do I mean by that? Well, we're gonna start with number two. The first test of who is an HCE is tied to how much they make, and the amount changes every year. Right now, that number is 160,000, but that will vary year to year. It's going to go up over time. And for my fellow compliance nerds out there, you know, I'm gonna mention there is also besides a highly compensated employee, there's another factor out there that has to do with Roth contributions and catch ups. That is what we call a highly paid employee. Yes. The number is different. A highly paid employee and a highly compensated employee are not the same numbers nor do they change at the same rate. So right off the bat, it's maybe a little bit more difficult than we think to determine who is a highly compensated employee. The definition of compensation itself can be open to a little bit of debate. But wait, there's more. Because it's not just compensation that we need to look at. It's also ownership. Anyone who is a five percent owner or more is considered a highly compensated employee. On the surface, relatively easy. Who's the owner? Or the the shareholders, so to speak? That's easy to do. However, we all know, especially in the small and medium sized business space, that oftentimes, businesses are family businesses. And when that happens, there's a situation that I like to call attributable ownership. In other words, if you don't own 100% of the company, but your spouse does and you happen to be an employee, congratulations. You are now a highly compensated employee. Ownership, we won't get into the details today. I don't think time allows. Ownership can flow between siblings. I believe it can flow between parents, grandparents. It's very complex. If you take nothing else away, know that determining ownership and compensation are harder than it might seem at first glance. So we know that once we determine who the highly compensated employees are, once we look at the aggregated contributions of both HCEs and those rank and file employees, there is a balancing act. Now what happens if a plan fails testing? Well, no surprise. It's complicated. Everything else today has been why not this? The plan sponsor has two options. They can fund what's called a qualified non elective contribution. In other words, pay some money, or they can return the excess. In other words, the company must refund some of the HCE's contributions through corrective distributions. Now you might recall at the very beginning, I mentioned when something goes wrong with discrimination testing, it can lead to some awkward conversations with business owners and with highly compensated employees. There's that awkward compensation. We know you shelter dollars in your four zero one k, but you need to give some of it back. There can be tax implications associated with that. So business owners need to ask themselves a question. Which type of plan do we want to sponsor? Safe harbor versus other types of four zero one k plans. Now as I talked about, it's in many respects a question of simplicity versus flexibility. If we take a look, we see that a pooled employer plan can be safe harbor, standard traditional four zero one k plan can be safe harbor. So there's no difference there. We see the maximum employee deferral for this year is the same. Catch up contributions, also the same. Employer contributions, here's where I say we start to get into those options. With a standard plan, there is the option for safe I'm sorry. There is the option for employer contributions. Under safe harbor, there are still options, but you'll know all of those options involve some type of employer contributions. Also, there's a vesting. Many of us are probably familiar with vesting. That is the the employer contributions. Those parts of an employee's four zero one k attributable to employer contributions, Well, it's not theirs right off the bat. It can become theirs in a graded fashion. There's also a cliff. The employer has options. Let's leave it at that for now. If keeping those contributions are potentially important, you can do that through a traditional or standard four zero one k. What you can't really do is do that through safe harbor. Employer contributions, those safe harbor contributions are going to be vested immediately. Everything else, we, we can either kind of explain simply or we've already talked about. Of course, ADP, ACP testing, we've discussed that at length. Loans available in both types of plans. Investment providers, Obviously, a lot of choice. Hard to argue with choice in either type of plan. And, of course, compatible with profit sharing, also a yes for both plan types. So from a participant standpoint, from an employee standpoint, I think it's fair to say that these two plan types, particularly given how common employer contributions are even in standard four zero one k plans, it's fair to say these plans are probably very similar from a participant experiential standpoint. So let's ask ourselves, why would a business choose Safe Harbor? Well, the number one reason I think is because it passes annual nondiscrimination testing. That is a big worry that is off the employer's plate. It allows maximum contributions, it promotes high levels of engagement, and it delivers the same advantages as any other four zero one k plan. So in a situation where maybe we have a state retirement mandate, a requirement that a employer offers some type of retirement plan, a four zero one k might do better than the state plan. Oftentimes, we see employers choosing safe harbor just because, frankly, it's a little bit easier and maybe a little bit lower risk as well. Within safe harbor itself, we have a couple of different plan types available when it comes to how we make the match, how we make the employer contribution. There's a nonelective contribution, a qualified automatic contribution arrangement or a QUACCA. Again, yet another acronym to remember. And then we have what's called a standard match and an enhanced match. All of these involve some degree of employer contribution going into a four zero one k. Whether we do that as a non elective, a standard match, or an enhanced match, it really comes down to how much an employer wants to help their employees, their employee base out with building retirement security. So there are different options available within a safe harbor plan when it comes to how we actually are going to execute on the match. The total match, the matching rate, and whether there's just a a standard amount or kind of a matching percentage. We do have that kind of flexibility even within the safe harbor plan world. So taking a quick look, I won't go through the chart in detail because I know my colleague Brian is about to jump on. But when it comes to contribution matching, the quacka, the nonelective, the 4% standard, and the 4% enhanced, you know, I really let's just call those 4% for the sake of simplicity. You know, there are ways to contribute a little bit less. There are ways to contribute a little bit more. I think it's fair to say that this often comes down to employee retention. An employer knows that employees have options, and oftentimes choosing the match the match paradigm that works best for their employee base is how they're gonna retain some of those high quality employees. Because, of course, we all know employees do look at retirement. So with that, I'm going to turn it over to you, Brian. I know you want to talk a little bit about the, the different four zero one k options that are out there. Thank you, Zach. Next, let's take a look at the reasons why most business owners start a four zero one k. Most candidates now assume they'll have access to a four zero one k, and actually look for this on the job posting sites such as Indeed. The four zero one ks is gonna eliminate time consuming reporting and transfers which are required with state run programs for state mandates. Next tax savings. Employees can contribute pre tax up to the IRS limits we just heard Zach speak on up to the 24,500 for this year. The four zero one ks is the most effective tax strategy used by business owners. This is the tool our CPAs and accountants use to defer income with their own businesses. Next is the Secure Act tax credits. Businesses with under 50 employees may be eligible for reimbursement for out of pocket costs for up to the first three years of the plan. In addition to that the IRS will cover up to the first thousand dollars of an employer match to each eligible employee. Next, let's talk about the Haas four zero one ks product in today's marketplace. My favorite, the Pooled Employer Plan, also known as the PEP. The pooled employer plan is a fully integrated plug and play option designed specifically to provide small businesses with a fortune 500 benefit without the administration one. As you can see, the options are very similar to the traditional payroll integration, safe harbor, automatic enrollment, pre tax as well as Roth contributions. In this case, Paychex takes on the responsibility of benchmarking the fund lineup quarterly to ensure only the best funds are available to employees. That way business owners can stay focused on their day to day. Now let's take a look at a chart that shows the difference between the pooled employer plan and a traditional four zero one k. On the left hand side, you can see the cost and setup. And that's the endpoint the pooled employer plan will have reduced cost with the reduced responsibilities for the employer. Paychex is the is the plan sponsor on the pooled employer plan and therefore assumes any responsibility for plan audits as well as preparing and filing the form 5,500. Both four zero one k options can offer the safe harbor provision and take advantage of the secure act tax credits, which again may cover the cost for the first three years of the plan. Now a few dates to keep in mind while taking the next steps to start your safe harbor plan. The IRS has a drop dead deadline of October 1 with safe harbor four zero one k's. This means that you wanna have your paperwork in your Paychex team towards the August to ensure you don't miss out on this year. I hope that was helpful. Stephanie, I'll pass it back to you. Thank you so much. This was wonderful information. As we shared, you might receive a poll and now is the time for that. So if you'd like to speak with a Paychex professional about starting a safe harbor four zero one k for your business, please mark your response and click the submit button. We will launch the survey right after the poll closes. So with that, we're giving you the basics today, but if you'd like to dive in deeper to safe harbor or retirement planning in general, you can find an array of resources related to today's topic in the docs column along with the printable PDF of today's slide deck. So make sure you print it out if you need additional information from what we've presented today. We'll also be sending you a follow-up email to all registrants with a link to the on demand recording within the next business day, and you'll be able to access the resources when viewing on demand also. If you haven't yet completed the brief survey that launched earlier, we encourage you to complete that now before we close it. We value and appreciate your feedback as your responses help us to create great educational events in the future that you can also participate in. And if you'd like today's webinar, we'd like to encourage you to check out Thrive, a Paychex Business podcast, where our hosts and guests cover the strategies, trends, and all the advice your business needs to stay ahead. You can find the Paychex Thrive podcast on YouTube, Apple podcast, Spotify, or wherever you normally listen to your podcast. With that, thank you again for joining the power of Safe Harbor four zero one k, and we wanna give that special shout out and thank you to Zach Keep and Brian Feeney, our presenters. If you're watching this presentation on demand and would like to request a free consultation on safe harbor, retirement planning, or other current needs your business has, please click the talk with our team button at the upper right hand corner of your console, and a Paychex professional will reach out to you shortly. Thank you again, and have a great day.