Safe Harbor and Vesting Schedules
401(k) Plans are the cornerstone of employee retirement savings. How can you boost plan participation by matching employee contributions without breaking the bank? This article outlines three options for you to consider.
Employers can allocate 3-4% of employee compensation via an annual contribution and avoid most compliance tests. For example, if an employee is contributing to the retirement plan, the employer can match with either:
Or, employers can make a 3% non-elective contribution to all eligible employees. The advantages of a safe harbor match include:
Safe Harbor matches are available to any employer with one or more employees, and must be offered to employees 21 or older who have worked at least 1,000 hours in the previous year. (Other restrictions may apply.)
Graded vesting allows employers to specify a schedule as to how their match contributions become available to employees. For example, if 20% annual vesting begins after an employee's first year of service, they would be 100% vested in six years.
The advantages of a graded vesting schedule include:
Graded vesting schedules are available to any employer with a qualified retirement plan. Graded vesting, however, cannot be used in conjunction with a cliff vesting schedule.
Cliff vesting allows an employer match to vest after a specified amount of time (usually one to three years). At the stated "cliff" date, the entire contribution by the employer vests. For example, a cliff schedule might have zero percent vested after two years of service. After the third year, however, 100% of the employer's contribution vests.
The advantages of a cliff vesting schedule include:
One of these options might be a good fit for you and your employees. Contact us today to learn more about employer match options that are cost effective and can help expand 401(k) participation without busting the budget.
 IRS.gov. “Mid-year Changes to Safe Harbor401(k) Plans and Notices.” Feb 21, 2020.
 IRS.gov. "Issue Snapshot - Vesting Schedules for Matching Contributions". June 19, 2019.
This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance or tax/legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation.
Securities and Investment Advisory Services offered through M Holdings Securities, Inc., a registered Broker/Dealer and Investment Advisor, member FINRA/SIPC. LoVasco Consulting Group is independently owned and operated.
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