What Is Safe Harbor 401k
As pointed out on the IRS website (irs.com), a safe harbor 401k plan is similar to a traditional 401k plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions may be employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals. The safe harbor 401k plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401k plans. Safe harbor 401k plans that do not provide any additional contributions in a year are exempted from the top-heavy rules of section 416 of the Internal Revenue Code. Employers sponsoring safe harbor 401k plans must satisfy certain notice requirements. The notice requirements are satisfied if each eligible employee for the plan year is given written notice of the employee's rights and obligations under the plan and the notice satisfies the content and timing requirements. In order to satisfy the content requirement, the notice must describe the safe harbor method in use, how eligible employees make elections, any other plans involved, etc. The timing requirement requires that the employer must provide notice within a reasonable period before each plan year. This requirement is deemed to be satisfied if the notice is provided to each eligible employee at least 30 days and not more than 90 days before the beginning of each plan year. There are special rules for employees who become eligible after the 90th day. Safe-harbor 401k plans are generally required to be established for the entire plan year, but before it starts. |However, establishing a plan in mid-year is still possible for a either a new 401k plan or a profit-sharing plan that adds a 401k feature mid-year. The general rule is that there must be at least three months remaining in the plan year for a new plan or a converted plan to make elective deferrals. Safe harbor plan designs are perfect for many employers since they remove testing and enable the highly compensated employees to maximize contributions. The advantage of avoiding testing is maximized contributions for the highly compensated. The safe harbor plan design waives the need for non discrimination testing and permits the company owners or those earning over $90,000 a year to contribute up to $20,000 to the plan on a tax deferred. However, some employers may be reluctant to forget about the schedules and 1000 hour/last day rules for entitlement to matching or non-elective contributions. Obviously, every business owner has his own, unique expectations, finances and demographics, and they should be carefully weighed before signing a safe-harbor plan.
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