Small Business

When employers are ready to sponsor a qualified retirement plan, a 401(k) is often the first one that springs to mind. However, many small to midsize organizations may hesitate to leap headlong into a 401(k) because of its inherent administrative complexity.

For example, traditional 401(k)s are subject to annual nondiscrimination testing to ensure that benefits provided under the plan don’t disproportionately favor highly compensated employees over non-highly compensated ones.

But did you know that eligible employers can avoid this hassle by sponsoring a safe harbor 401(k)? Read on for some insights into this intriguing benefits vehicle.

Basic features

A safe harbor 401(k) is a version of the well-known qualified retirement plan that automatically satisfies the nondiscrimination rules because the employer-sponsor agrees to make specified minimum contributions to participants’ accounts. Generally, this means either:

• Matching 100% of employees’ payroll-based contributions (elective deferrals) up to 3% of compensation and then 50% of contributions on the next 2%, or
• Making a nonelective contribution of at least 3% of compensation to all eligible employees, regardless of whether they contribute to their accounts.

The primary advantage of setting up a 401(k) this way is that it exempts your organization from having to annually perform complex nondiscrimination testing, which simplifies plan administration considerably.

Another advantage is safe harbor 401(k)s allow highly compensated employees — typically owners and executives — to max out their personal contributions without worrying about causing the plan to fail nondiscrimination testing. This can happen with traditional 401(k)s.

What’s the catch? Employer contributions are mandatory — and they fully and immediately vest in participants’ accounts. So, regardless of which of the two routes you take, you must have the cash flow to fund those contributions. Generally, once you provide employees with the required “safe harbor notice” in writing, you’re legally committed to making the specified contributions for the plan year.

Top-heavy rules

The nondiscrimination rules focus on yearly contributions to traditional 401(k) plans. Also applicable are so-called “top-heavy” rules, which focus on the overall distribution of plan assets.

According to the IRS, “A defined contribution plan is top-heavy when, as of the last day of the preceding plan year … the aggregate value of the plan accounts of key employees exceeds 60% of the aggregate value of the plan accounts of all employees under the plan.” (Key employees are generally owners or highly compensated “officers” as defined by the IRS.)

So, are safe harbor 401(k)s also exempt from the top-heavy rules? The answer is usually, but not always. A safe harbor 401(k) with only elective deferrals and safe harbor matching contributions is generally exempt from being top-heavy. If the plan is making a nonelective contribution of 3% to all employees, it also automatically satisfies the top-heavy contribution requirement.

However, a safe harbor 401(k) with matching contributions may lose its exemption from the top-heavy rules if:

• The plan allows discretionary nonelective contributions, and one is made,
• Forfeitures are allocated to participants’ accounts in the same manner as nonelective contributions, or
• Employees can make elective deferrals immediately but aren’t eligible for a matching contribution until after they complete one year of service. (This is uncommon.)

Thus, nonexempt safe harbor 401(k) plans can become top-heavy because key employees’ accounts can receive maximum contributions. If a plan becomes top-heavy — and a key employee defers or receives an allocation of a certain percentage — the employer must allocate that percentage to all eligible non-key employees.

Furthermore, if the plan is making a safe harbor matching contribution — and it’s not considered exempt — you’ll need to make extra contributions of the required percentage for eligible employees who aren’t making elective deferrals and for participants who are deferring less than that required percentage.

Bottom line

If your organization decides to sponsor a safe harbor 401(k), it’s critical to carefully design the plan in consultation with the appropriate professional advisors. Contact us for help assessing the costs and tax impact of any qualified retirement plan or other fringe benefit you’re considering.

© 2025 TopLine Content Marketing Team

Most employers recognize the importance of regularly scheduled performance reviews. The challenge is how to administer them.

There are two general approaches: numerical and narrative. If you believe your organization’s performance review process has room for improvement, don’t hesitate to take a step back and reevaluate.

Going by the numbers

Numerical performance reviews are purely analytical. For each employee, supervisors assign a score or rating to various performance descriptors such as:

• Demonstrates knowledgeability of position,
• Meets productivity expectations,
• Communicates effectively with colleagues, and
• Adheres to deadlines.

Supervisors then calculate scores by averaging ratings across multiple criteria or weighting them statistically based on importance. Some employers develop standardized rubrics to ensure consistency.

The primary advantage of numerical reviews is they’re quantifiable. They allow the organization to easily and efficiently analyze employee performance, spot trends, and identify areas of improvement during the review period. Numerical reviews may make sense for sales positions, which are largely metrics-driven anyway, and for large teams where everyone does the same job.

The main disadvantage is that, for many positions, numbers alone don’t capture the full scope of what employees do. For instance, jobs centered on creativity and innovation may not always show pronounced signs of productivity. Also, the wording of criteria and how supervisors score workers may be subject to bias. Some employees resent numerical reviews for these reasons or others.

Using your words

True to their name, narrative performance reviews tell the story in writing of how employees performed during the review period — noting accomplishments, highlighting strengths and identifying areas of improvement. The objective is to provide a comprehensive assessment tailored to each worker’s distinctive background, experience and situation.

Narrative reviews have notable advantages. First, employees receive specific descriptive feedback on their performance rather than just a score or rating, which may be vague or easily misinterpreted. These reviews typically encourage professional development because they explicitly tell employees what they’re doing right and how to improve. Narrative reviews are also widely regarded for strengthening engagement because workers feel more valued when their contributions are put into words instead of reduced to numbers.

Of course, narrative reviews have potential downsides. They’re much more time consuming and labor intensive for supervisors. Whereas numerical reviews can be largely or wholly calculated by software, narrative reviews require human input and effort.

Also, narrative reviews make it difficult to compare employees’ performances from review period to review period and may hamper an employer’s ability to spot larger trends. And there’s the ever-present issue of subjectivity: Because narrative reviews rely on the supervisor’s perspective and skill at performance evaluation, they can be biased, confusing or inaccurate.

Devising a hybrid approach

One recent survey demonstrates the difficulty many employers face in choosing the optimal approach. In July 2024, the Academy of Management published a study entitled The Power of Words: Employee Responses to Numerical vs. Narrative Performance Feedback. It contained survey results of 1,600 U.S. workers that found “narrative-only feedback was generally perceived as the fairest” and often increased employees’ motivation to improve at their jobs.

“Great!” you might say. “Let’s go with narrative.” Not so fast — the survey also found that numerical reviews or a hybrid approach were viewed as fairer “when the feedback was extremely positive or when recipients were informed about associated monetary outcomes.”

Perhaps the only thing that’s clear is you and your leadership team must consciously address the right performance review approach to arrive at a reasonable strategy customized to your organization’s size, mission and demographics. Devising a hybrid approach may be best in many cases. Alternatively, you could opt for numerical or narrative, depending on the purpose of the department or team.

Reaping the rewards

A well-crafted and deftly executed review process appeals to job candidates, strengthens employee engagement and retention, and drives productivity. Please contact us for help identifying and analyzing all your organization’s costs associated with performance management.

© 2025 TopLine Content Marketing Team

Under the Consolidated Omnibus Budget Reconciliation Act (COBRA), employers with 20 or more employees that sponsor a group health insurance plan must offer “continuation coverage.” That means if employees leave their jobs for certain reasons, the organization must generally offer them ongoing health coverage for 18 months, though extensions sometimes apply.

If your organization meets the criteria and has been operating for a while, you’ve probably had to offer and administer COBRA coverage. Doing so can be challenging, so staying sharp on your responsibilities is important. Let’s look at a couple issues that many employers grapple with: providing notices and requesting “COBRA releases.”

Providing notice

With COBRA coverage such a routine part of the employment landscape, it’s easy for employers’ processes for issuing and tracking COBRA notices to grow lax.

Under the law, you must notify your plan administrator of a departing employee’s eligibility for COBRA within 30 days of the individual’s last day of work. The administrator then has 14 days to notify the employee of their right to elect COBRA coverage.

Thus, if your organization both sponsors and administers its health insurance plan, you have up to 44 days to give participants (or, in the case of death, their beneficiaries) notice of their COBRA coverage rights following a “qualifying event.” These include (but aren’t limited to):

• Voluntary or involuntary termination for reasons other than gross misconduct,
• A reduction in hours,
• Death of the covered employee, and
• Divorce.

If a plan administrator fails to provide the required COBRA notice, it may be personally liable to such participant or beneficiary for up to $110 per day from the day of such failure.

Beyond the statutory penalty, lawsuits are another major risk for employers. If a former employee claims to have never received a COBRA notice, you’ve got to be able to prove otherwise. Be sure to keep careful records of when you mail COBRA notices and evidence that you did so. You may send COBRA notices electronically, but special rules apply — including obtaining each recipient’s consent.

Requesting a release

Lawsuits are a particularly acute risk when employees are terminated, laid off or have their hours reduced. To mitigate this risk, some employers may consider asking departing employees to sign a release of employment-related claims against the organization as part of the process.

First things first, you can’t require affected employees to sign such a release to obtain COBRA coverage. You can, however, incentivize them to do so.

For example, your organization could offer to pay all or a portion of the COBRA premium for some or all of the coverage period in exchange for a release of claims. Or your organization could offer other non-COBRA coverage to induce a departing employee not to elect COBRA. For instance, you could offer a choice between:

• Receiving COBRA coverage with full responsibility for the COBRA premium, or
• Waiving COBRA coverage in exchange for four months of alternative coverage fully paid by your organization but expressly conditioned on the employee signing a release of employment claims.

Even if employees accept the offer of alternative coverage, they’ll retain the right to elect COBRA until the 60-day COBRA election period expires. So, the arrangement can’t be considered final until then.

In addition, employees must still receive full information about their COBRA rights through the notice. If they don’t, the waiver of COBRA coverage at the end of the election period may be treated as invalid. When the alternative coverage terminates at the end of the specified period, you don’t have to offer the employee another COBRA election.

If you’re intrigued by the concept of a COBRA release, discuss it with your attorney. Additional rules and details may apply.

Being responsible

A robust and competitive group health insurance plan has become a fundamental fringe benefit for employers of all types and sizes. For better or worse, COBRA coverage and all its associated responsibilities often come with it. Contact us for help identifying and analyzing all the costs associated with your organization’s benefits.

© 2025 TopLine Content Marketing Team