In the battle for talent, every benefit you offer counts when it comes to attracting employees to your organization.
According to the 2024 Compensation and Benefits Report, nearly 80% of responding landscape companies offer a retirement plan. However, if you find yourself in the 20% who do not currently offer a retirement plan, this could be due to the daunting nature of offering a traditional 401(k) plan.
One possible option to explore that helps reduce some of the administrative burden is a safe harbor 401(k).
Parke Kallenberg, managing partner with ADVANCE Consulting Group, says it took a few years before he could talk his wife into doing the safe harbor 401(k) plan for their business because she felt they were giving away money.
“I told her every year we write a check to the IRS,” Kallenberg says. “I’d say, ‘We can write a check to the IRS for say $60,000, or we can give our employees $52,000, which would you rather do?’”
What’s the Difference From a Traditional 401(k)?
A traditional 401(k) allows employees to defer a portion of their salary pre-tax. Employers can choose whether they want to make nonelective contributions to each eligible participant, match employees’ deferrals, do both or neither.
With this plan, owners have the flexibility to change the amount of nonelective contributions each year. If you choose to make nonelective contributions, you must make a contribution for each eligible participant, whether or not the participant decides to make a salary deferral to his or her 401(k) account.
Matching contributions must vest at least as rapidly as a six-year graded vesting schedule.
The main challenge with traditional 401(k)s is ensuring that they do not unfairly favor highly compensated employees. To ensure the benefits are proportionate for all workers, annual nondiscrimination testing is required. The Actual Deferral Percentage and Actual Contribution Percentage tests verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees.
With a safe harbor plan, the administrative burden of these nondiscrimination tests is not required. This is because instead employers provide a fixed, mandatory contribution that is immediately vested.
“In a regular 401(k) if you put in $100 and the company matches 3% with $100 for your money, that’s always yours,” Kallenberg says. “But the $3 you have to wait the three years or five years, for however long it is, before it’s your money. If you have a safe harbor program, the part that’s matched for your 401(k), that $3 is yours the day you get the paycheck.”
Under the basic safe harbor plan, companies can match each eligible employee’s contribution up to 3% of the employee’s compensation, and 50 cents on the dollar for the employee’s contribution that exceeds 3%, but not 5%, of the employee’s compensation. Businesses also have the option to make a nonelective contribution equal to 3% of compensation to each eligible employee’s account.
Each year, you must make either the matching contributions or the nonelective contributions.
Benefits of a Safe Harbor 401(k)
A safe harbor 401(k) is a good fit if for smaller businesses looking to attract top talent or if your current 401(k) plan has a low level of engagement among your non-highly compensated employees due to factors such as personal financial insecurity or an inability to contribute.
On top of the required matching or 3% nonelective contribution, companies may make additional profit sharing contributions. Kallenberg recommends bringing your team’s attention to this benefit so they fully understand what they’re receiving.
“It can be a huge differentiating factor when you’re recruiting,” Kallenberg says. “Let’s say you’ve got an account manager making $60,000-$70,000 year, and the company up the street offers them $10,000 more. They’re looking at it because it’ll help their lifestyle. You go, ‘That’s great. You realize you have $30,000 in your profit sharing,’ and they’re like, ‘What?’ Because they don’t think about it. I just think demonstrating the willingness to invest in your employees, that’s how we change the industry. That’s how we really move it forward.”
Kallenberg says with his previous business, they would put a large chunk of their profits in their safe harbor 401(k), which was then divided between the owners, the managers, full-time and part-time employees.
“The lowest number we could ever give was 5% of their salary,” Kallenberg says. “So, if somebody made $30,000 they’re going to get $1,500.”
Kallenberg says it’s particularly beneficial to have your employees vested immediately if you are planning on a change of ownership in the near future, as the buyer is not obligated to continue the program.
There are also several tax credits available to help with starting a safe harbor plan. Businesses with up to 50 employees may be eligible for a tax credit to cover 100% of plan start-up costs for a workplace plan capped at $5,000 annually for the first three years.
Kallenberg recommends that those starting their business offer a safe harbor 401(k) from day one.
“Especially for the smaller guys $5 million and below, there are three things that will make your business build a retirement pathway for you,” Kallenberg says. “One, own the buildings you’re in. Two, set your business up so that it either provides you with cash flow or a lump sum at the time that you’re ready to step away, or three, do some kind of retirement program, and safe harbor works really well. If you’re doing $5 million a year, you should be able to build a very, very nice retirement nest egg.”
Requirements To Be Aware Of
Companies using the safe harbor 401(k) plan are required to provide notice within a reasonable period before each plan year, typically 30 to 90 days before. For new employees, they should be informed no earlier than 90 days before their plan entry date and no later than that date.
Kallenberg says after holding a meeting where their investment counselor spoke to the staff about the safe harbor plan, he would have a secondary meeting to explain the retirement plan in layman’s terms.
If you opt to do contingent nonelective contributions during the plan year, 30 to 90 days before the plan year starts, a ‘maybe notice’ must be distributed. If it is decided a nonelective contribution will be made, employees should be informed no later than 30 days before the last day of the plan year.
If the nonelective contribution is not made, the plan is subject to ADP/ACP and top-heavy testing that year.
