In response to some of the recent economic difficulties, many employers have looked to their retirement plan contributions as a means of cost cutting. If your company has needed to suspend your Safe Harbor or matching contributions, there are few techniques that might help limit the damage.
1. Warn your HCE’s (Highly Compensated Employees)
One of the underlying benefits of providing a safe harbor contribution or match is the improved/waived non-discrimination testing that 401(k) plans are typically subject to. Without a safe harbor, owners, their family members, and highly compensated individuals (making over $130,000) are limited in the amount they can contribute to their retirement account pre-tax. In oversimplified terms, this testing limits HCE’s to contributing on average 2% of gross pay more than the average of all non-HCE’s.
In years that this testing fails, HCE’s will receive a refund check that becomes taxable income to them. If your HCE’s have become accustomed to maxing their annual contributions thanks to safe harbor provisions, this may come as an unwelcome surprise. Make sure you are warning your HCE’s what to expect and the reasoning behind the changes to avoid them being blindsided come tax time.
2. Encourage employees to continue saving
Without a company contribution, some employees can feel discouraged and choose to decrease their own contributions. This is generally not advisable. On an individual basis, fewer dollars going into your account from your employer means you should want to save more, not less, to keep yourself on track for retirement. From an owner and highly compensated individual’s standpoint, your savings ability is directly impacted by the savings rates of others in your company. Often a reminder or explanation of point one in this paragraph (increased responsibility at the individual level) combined with a reminder that market downturns are a great time to invest can help stave off this issue.
3. Consider discretionary profit sharing
Some businesses opted to suspend a match or safe harbor early in the recent economic uncertainty. If you exercised this option but now find money not as tight as originally anticipated, consider utilizing discretionary profit sharing. One great feature of profit sharing is the flexibility available, different from the handcuffs required by a match or safe harbor formula. Your advisor and third-party administrator can help illustrate some of the options available to still enjoy the tax benefits of employer contributions.
4. Find alternative savings vehicles
If your personal financial plan had factored matching and safe harbor dollars into your savings rates, you may need to be putting away more money on your own to account for this. As mentioned above, owners and HCE’s are doubly affected by the change. To account for the decreased 401(k) savings, look to other tax advantaged accounts to save additional dollars towards retirement. Perhaps your partner has the ability to put more into their employer sponsored plan. If not, utilizing an IRA may provide the vehicle you are looking for.
It is important to note that the IRS limits households earning over $196,000 from funding ROTH IRAs, however depending on your circumstances, you may be able to use a backdoor ROTH strategy.
5. Be familiar with the guidelines for restarting
You and your company added the safe harbor or match for a reason. Once things have stabilized, it is likely that you will want to return to this form of employer contribution. To avoid employees being taken advantage of by their employers stopping and starting contributions, the Department of Labor restricts when a company can restart their contributions:
Matching contribution (no Safe Harbor) – employer matching dollars may be restarted at any time via a plan amendment.
Safe Harbor Match – employers can restart their safe harbor matching at any point throughout the plan year. However, to enjoy the benefits of the safe harbor, employers would need to back date that matching contribution to cover the full plan year.
Safe Harbor Non-elective 3% – the benefits of a safe harbor non-elective come with a few extra hurdles. This feature cannot be restarted until the beginning of a plan year.
The halting of employer contributions into a retirement plan is rarely an ideal situation but armed with the right strategy, it does not need to derail the progress that you and your employees are making towards a comfortable retirement.