Getting the most out of your plan

Hi, I’m Richard and I run a small IT services company. I have a small group of employees working for me and recently, I decided to set-up 401(K) accounts for them. While inquiring about 401(K) plans for this purpose, I came across something known as a Safe Harbor 401(K) plan. What kind of plan is this? Could you please care to explain?”

Hi Richard,

It’s great to hear from you and like we always say, we’re simply here to help people like you. Now coming to your question, Richard, we would like you to know that this one of the more rare topics we come across. Wondering why it’s so rare? Well, it’s rare because the Safe Harbor 401(K) option is something that most people don’t opt for.

It’s an investment option that only complicates things, especially if you’re running your own business. So, instead of making you guess, we’ll just get down to helping your figuring out what goes on with a Safe Harbor 401(K). After you get a fair idea about the plan, you can go ahead and make a decision about whether this plan suits your needs or not.

The first thing about a Safe Harbor 401(K) is that the business owner is expected to make necessary contributions as matches. At first, these plans might seem great, but, if you have fewer than 25 employees or are okay with making the necessary employer contributions, you will have to dig deeper.

There are a few benefits to this type of 401(K) plan. You can make maximum contributions to your own account. However, you are also required to make matching “safe harbor” contributions to the accounts of your employees as a percentage of their compensations. What this means is that both, you and your employees, can increase tax-deferred contributions without being subject to the restrictions normally imposed on a traditional plan that does not need matching contributions.

The key contribution features are:

  • The maximum salary deferral contribution can be made by all participants.
  • The contributions can either be Roth deferral contributions, pretax, or both.
  • The overall contributions from employers and employees should not be above $ 52,000 or 100% of income per participant.
  • The employer must match employee contributions i.e. 100% of the initial 3% of salary and 50% of the remaining 2% of salary. Or else, they must offer a non-elective contribution i.e. 3% of salary for each eligible employee.

Here are a few things to consider:

  • Safe Harbor contributions and employee deferral are instantly vested.
  • The plan can be a complex one. You will need an administrator to oversee compliance, record keeping, testing, IRS Form 5500 filing, and maintenance.

These are some of the core features of a Safe Harbor 401(K). To access more detailed information, we suggest that you take a look at www.401keasy.com. 401K Easy has all the information you need about Safe Harbor plans.

About Elliot Earl, Director, Pension Trade Association
Director, Pension Trade Association Founded in 1982, the Pension Trade Association [California Domestic Nonprofit Corporation #C1629080] is dedicated to helping workers save for their retirement through expanded coverage of 401k -type defined contribution pension plans.

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