Business owners can maximize their contributions and pass annual ADP/ACP tests using the Safe Harbor 401(k) plans. Hence, most small businesses today use Safe Harbor 401(k) plans for their employees as an easier and less expensive retirement plan. To achieve Safe Harbor status, business owners must make contributions on behalf of their participating employees. The Safe Harbor plans are subject to vesting requirements and special contributions that employers need to fulfill. 401K providers, such as , have additional information on how Safe Harbor 401K plans can truly benefit your business.
Safe Harbor 401(k) Plan Rules
To bypass the traditional non-discrimination testing and ensure that all your employees can benefit from the plan, you should consider the following requirements of a Safe Harbor plan before setting it up.
- All Safe Harbor contributions are required to be vested immediately. Even after the employee resigns or is terminated, they cannot be returned to the employer.
- On behalf of your employees, you are required to make annual contributions to the plan as an employer.
- As of 2020, if you have less than 50 employees, the employee deferral limits are $19,500 per year. For 50 or more employees, you need to have $26,000 in catch-up contributions. As an employer, you must stay within the acceptable contribution limits every year.
Steps to Set Up a Safe Harbor 401(k) Plan
If you are a business owner looking to set up a safe harbor plan, here are the steps you need to follow.
1. Determine if this plan is right for you
There are several 401(k) plans with different advantages. Hence, you first need to determine if this plan is for you. If you are a business looking at rewarding your owners, as well as employees with a higher retirement contribution while legally bypassing the expensive non-discrimination testing required by the IRS that requires completion of administrative tasks, then the Safe Harbor 401(k) might be for you.
Generally, the Safe Harbor plan is best suited for medium growth businesses and startups.
2. Plan Development
Businesses need to decide on the plan’s important conditions, draw up a contract, notify their employees about their rights and obligations under the new plan. They also need to submit the plan within the appropriate IRS deadlines. If you are adopting a new 401(k) retirement plan, the Safe Harbor plan’s provisions must be in place for at least 3 months. Therefore, if your business is starting a new calendar year plan, then the plan is required to begin no later than Oct 01st, 2020.
3. Plan Funding
Further, businesses need to decide how to fund the plan. Popular options include bank funds, assets, traditional brokerage account. As business owners, you also need to decide if you are making any Roth or pre-tax contributions or contributions under profit-sharing plans.
4. Plan Administration
Businesses can face severe penalties if they do not administer the plan in compliance with the laws. Plan administration can be complicated, and therefore, you can get your plan provider’s help to assist you with compliance and administration.