Double Advantage Safe Harbor (DASH) 401(k)

What Is a Double Advantage Safe Harbor (DASH) 401(k)?

The term double advantage safe harbor (DASH) 401(k) is a retirement investment plan that combines the benefits of a traditional 401(k) with a profit-sharing plan. Just like regular 401(k)s, these plans are offered to workers of participating employers. This type of plan maximizes the tax efficiency for both employers and employees. DASH 401(k) plans are well-suited for small or mid-sized businesses and companies that want to compensate employees at specific levels.

How Double Advantage Safe Harbor (DASH) 401(k)s Work

Investors have a number of options when it comes to how they want to save for their retirement. Many people can take advantage of the different employer-offered options, including 401(k)s. These are tax-advantaged savings plans that allow workers to contribute to their retirement plans through automatic payroll deductions. Some employers match some or all of these amounts.

The double advantage safe harbor 401(k) is one of these options. This employer-sponsored plan is a hybrid plan that combines both the safe harbor 401(k) with profit-sharing. Safe Harbor 401(k)s work just like traditional 401(k)s with one key exception. Employer contributions are made without having to go through a vesting period. Profit-sharing allows companies to include employees in their profits.

The DASH 401(k) plan is commonly used by employers who want to maximize contributions to certain employees, such as owners and company executives. In exchange for mandatory vested employer contributions, administration fees are generally lower than a standard 401(k) plan and contribution limits are often much higher. Employers and employees can contribute the maximum allowable deferral on an annual basis. Companies can make tax-deductible contributions through profit-sharing.

There are three steps to creating a DASH 401(k):

1. First, the employer makes 3% vested contributions to elect safe harbor plan status. This buys the plan an exemption from the actual deferral percentage (ADP) testing requirements, which are set by the Internal Revenue Service (IRS), allowing higher-paid employees to maximize their elective deferrals.
2. Because the ADP testing requirements are removed, the second step is to maximize elective deferrals by the highly paid employees, such as through employee contributions.
3. Additional profit-sharing employer contributions are made. Calculations are made to determine the number of additional contributions that can be made without diluting the allocations to the business owner.

The actual deferral percentage test is the percentage of an employee's salary that is deferred under a 401(k) retirement plan. This test ensures that companies are compliant with IRS rules and that they don't favor higher-paid employees over those who receive lower wages.

Special Considerations

As noted above, employers who offer their employees a DASH 401(k) plan commit to making a 3% contribution. This amount is immediately vested to all eligible employees. Any profit-sharing contributions that are made are done so at the employer's discretion.

But the DASH 401(k) plan is not suited to all employers. That's because it combines an age-based plan with a safe harbor plan. It is, however, ideal for business owners and management who are older than their employees.