Why Consider a Safe Harbor Match vs. a Discretionary or No Match

Non-Highly Compensated Employees usually reduce, at times greatly, what Highly Compensated Employees can contribute from their pay, to a Plan, when the company does not have a Safe Harbor match program in place.
Why a Safe Harbor Matching Program
The best way to allow highly compensated employees (HCE’s) to contribute the maximum allowed to a 401(k) Plan, is for a company to commit to an IRS approved Safe Habor match program.
An HCE is generally any Owner (also employed family members of Owner) or an employee who earns $135,000 (in 2022). An NHCE are all other W-2 employees.
If the company commits to a Safe Harbor matching contribution program, then highly compensated employees (HCE’s) can contribute the maximum from their paychecks ($20,500 in 2022, can be made as pre-tax or Roth employee deferral contributions + $6,500 for anyone age 50+).
There are 2 IRS approved Safe Harbor matching programs, of the 2 programs the 4% Safe Harbor match program would likely result in the lowest cost to the company, based on our longstanding work with the cannabis industry. We can make assumptions, based on our experience with your industry, create an illustration like the one below to help create greater understanding of how this type of match program works and what it would cost the company (although company contributions generally reduce the company’s taxes).
As you will see below in our explanation of the impact to Owners/HCE’s if there is not a Safe Harbor match program, adding a Safe Harbor match program, largely benefits the Owners and HCE’s the most. The “cost” to the company really ends up being the match to all employees (HCEs and NHCEs) and can be estimated at 1% - 3% of employee pay budget.
Without a Safe Harbor Matching Program

If the company will not commit to a Safe Harbor matching program, then, you are spot on – HCE’s will be limited in what they can contribute from their paychecks.
  • We generally find that employees begin to contribute when annul compensation is $60,000 or greater.
  • An overall average for an industry such as yours is typically between 1% to 3% of pay on average for all employees.
  • Discrimination testing will limit the owners and HCE’s to just 2% greater than the actual average percent. This will be significantly less than the available $20,500 annual limit. If you take $100,000 in compensation your contributions would be $3,000 - $5,000.
 To try and gain an understanding of what your HCE’s would be limited to, we can collect an employee census from you (needs to include estimated compensation and more for the 2022 year) and then make a lot of assumptions:
  • How many HCE’s will participate, how much HCE’s will contribute; and
  • How many non-highly compensated employees will participate, how much NCHE’s will contribute.
  • Stated another way, we aggregate the average of all the contributions made by HCEs, then we aggregate the average of all the contributions made by NHCE’s and then we compare the average percent contributed against each other. There can generally be no more than a 2% difference between the groups. This is not much of an allowable difference and can generally result in significant reductions to HCE contributions.

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