Safe Harbor 401k Plan
A safe harbor 401k plan is an ideal choice for a young business owner who is looking to start small and put aside some money for retirement. A traditional 401k plan allows you to contribute as much as $18,000 and an additional $6,000 if you are above the age of 50.
If you have employees, the IRS requires you to provide a 401k plan to your employees so that they can start saving for retirement. In order to ensure that retirement plans are not too skewed in favor of the highly compensated employees, the IRS requires certain compliance testing to be done. These tests can be complicated and can create a significant over head for you as a business owner. What is worse is that if none of your employees contribute to their 401k’s, you can’t either!
This sticky situation can be bypassed if you implement a safe harbor 401k plan. This way you can avoid most of the testing requirements of the IRS and can contribute to the plan irrespective of what your employees do.
What is a safe harbor 401k plan?
A plan is a safe harbor 401k plan if you agree to make certain minimum contributions to your employees in a retirement plan. There are two types of safe harbor plans:
Safe Harbor Non-elective plan: In a Safe Harbor Non-Elective plan, you are required to make a contribution equivalent to 3% of W-2 compensation to all eligible employees.
Safe Harbor Matching Plan: In a Safe Harbor Matching plan you are required to make a contribution only to those employees who contribute to the 401k plan. The amount of the contribution will be equal to their 401k contribution up to a maximum of 4% of their W-2 compensation
So which plan should you choose?
The cost of funding the retirement plan will vary significantly depending on which plan you choose. If you estimate that only a few employees will participate in the pension plan then a safe harbor matching plan might prove to be a better option. Anecdotal evidence suggests that employees earning less than $30-40k annually do not contribute to a 401k plan. If you have employees with compensations in that range, a safe harbor matching design will reduce your pension funding costs.
However, if you expect all employees to contribute some amounts to the 401k plan then the safe harbor non-elective design will prove beneficial.
This is only a basic overview of the safe harbor 401k plans and enhancements can be explored that increase allocations to the business owners. Please feel free to get in touch with our office and we shall be happy to provide a free consultation and customized plan design for you. Schedule a conference call with us.