Safe harbor 401(k) plans can be a win-win for employers who want to maximize tax savings and retain employees. There is still time to reap the benefits for 2018.
1. Safe harbor basics
A safe harbor is like a traditional 401(k), but the employer must contribute, and contributions become fully vested when made. Contributions can either be limited to employees who make deferrals or offered to all eligible employees.
2. The trade-off may be worth it
Unlike traditional 401(k) plans, safe harbor plans automatically pass a number of required tests in order to keep your plan tax qualified and avoid other penalties and costs. These plans can be a great choice for small businesses that may have trouble passing nondiscrimination testing. For example, a family-owned or small business with more highly compensated employees relative to “rank and file” or non-highly compensated employees may otherwise have difficulty passing compliance tests.
3. More good news
The business owner can contribute the maximum annual deferral amount to his/her own 401(k) plan ($18,500 plus any catch up contributions), receive additional savings from the company’s matching contributions (they’re an “employee” too) and, come tax time, the business can deduct all matching contributions (up to the $55,000 IRS limit).
4. There is still time to maximize the savings for 2018
Safe harbor plans must be in effect three months prior to the plan year-end date, which means eligible employees must be able to make salary deferrals starting no later than the payroll period that ends on or after October 1 of the plan’s first year. This means plan sponsors must make decision and sign necessary documentation by September 1.
5. If you already have a plan, you can take advantage too!
If you offer a different plan, but would like to take advantage of Safe Harbor benefits, here are dates to know:
- By or before November 30, 2018: Your provider can amend your plan or start a new plan with a safe harbor provision for the following year
- December 1, 2018: Your employees receive a 30-day notice of plan revisions
- January 1, 2019: Safe Harbor provision takes effect and exempts the plan from nondiscrimination testing
Overall, there are benefits to any type of retirement offering, but a safe harbor plan can be a smart decision for many companies, particularly for small business owners. If you have any questions about whether a safe harbor plan is right for you, reach out to email@example.com at any time.