For many small business owners, establishing a Safe Harbor 401k plan is beneficial and is a choice worth looking at as it provides excellent tax and retirement benefits for both the employer and employee.
By having a great retirement plan for your employees, you demonstrate your investment in their future, which will help you recruit and retain the best talent in the industry.
Safe harbor deadlines are the one thing to look out for so that you don’t miss out and have to wait another year.
What’s the Purpose of a Safe Harbor 401k Plan?
As an employer, you already know that offering a 401k makes it easier for you and your employees to save more for retirement.
The government wants to ensure everyone takes part meaningfully and benefits from the plan their employer offers. And, as a result, the IRS has set up a series of nondiscrimination tests designed to measure whether a 401k favors ownership and highly compensated employees (HCEs).
A safe harbor 401(k) is a program designed to avoid annual nondiscrimination testing of employees’ elective contribution and employers matching contribution that’s required in a 401(k) plan.
There are two types of Safe Harbor 401(k)s; Standard Safe Harbor and QACA Safe Harbor.
Download the below PDF to see the comparison.
Safe Harbor Deadlines
Time is of great essence when considering a safe harbor 401k plan.
To implement a new safe harbor 401k plan, remember October 1st is the final safe harbor deadline day.
Still, consider starting earlier than that, given you need time to send a notice of 30 days to your employees before the deadline day since you’re making a matching contribution and a few more days for initial coordination.
Essential dates when starting a new safe harbor 401k plan
By August 15th, set up your guidelines for safe harbor 401k.
By September 1st, give a 30-day notice to employees for a safe harbor matching plan
On October 1st, the safe harbor 401k plan is effective and exempt from nondiscrimination testing
Essential dates for an existing 401k plan
November 30th request the addition of a safe harbor matching provision to your existing 401k plan
By December 1st, send a 30-day notice to your employees
On January 1st, the safe harbor 401k matching takes effect and spare the plan from nondiscrimination
Is a Safe Harbor 401k Plan Right for You?
A safe harbor 401k plan is an excellent choice if your business plans to match employees’ contributions and don’t want to worry about nondiscrimination testing.
The safe harbor 401k includes significant tax savings, and your employees will be happier.
On the flip slide, it will increase your overall payroll depending on the amount of participation. Small businesses should weigh the pros and cons of the safe harbor 401k before going that way.
If you need help finding which plan makes sense for your company, schedule a virtual plan discussion with me (CLICK HERE).
Feel free to reach out to me with any questions you may have.
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President
8400 Normandale Lake Blvd, Bloomington, MN 55437