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As highly qualified workers meet a choice of employment options, competitive benefits packages have become par for the course.
A Safe Harbor 401(k) plan has become an increasingly popular benefit with business owners. That’s because it opens the door for much higher contributions for owners and highly compensated employees (HCEs). These plans allow you to legally bypass the costly compliance testing associated with 401(k) Plans. Further, all employer contributions are tax deductible at the corporate level. What Is A Safe Harbor 401(k) Plan And Is It Right For Your Company? As highly qualified workers meet a choice of employment options, competitive benefits packages have become par for the course.
A Safe Harbor 401(k) plan is a type of retirement plan that allows employers to avoid most annual compliance tests. With a Safe Harbor 401(k) plan, employers and HCEs can save up to the maximum amount each year.
| Year | 401(k) Contribution Limit |
|---|---|
| 2024 | $23,000 |
When a 401(k) plan includes a safe harbor provision, the employer commits to a minimum level of contribution per eligible employee. These contributions are immediately vested. In exchange, the IRS gives you a “pass” on the annual 401(k) compliance testing.
A Safe Harbor retirement plan may be appropriate for your company if:
Safe Harbor 401(k) plans can be an effective way for employers to save the IRS annual maximum amount while eliminating the administrative headaches of annual compliance testing. Additionally, it may improve plan participation and help your employees save more for retirement. Whether you’re starting a new plan or looking for ways to improve an existing one, it may be worth considering adding a Safe Harbor provision.
Safe Harbor 401(k) plans require employers to choose one of three possible contribution options:
Employer matches 100% of the participant’s first 3% of deferred compensation and a 50% match on the next 2% of compensation deferred.
Example: If James earns $135,000 and defers 4% of compensation, his match would be:
$40,500 = (3% x $135,000) x 100% + $675 = (1% x $135,000) x 50%
$4,725 = Total
Note: Only employees deferring will receive a match contribution.
Employers match 100% of the first 4% of each employee’s contribution, not to exceed 6% of compensation deferred.
Example: If the employer chose a match equal to 100% of deferrals up to 4% of compensation, using the same example above, the match would be:
(4% x $135,000)
$5,400 = Total
Note: Only employees deferring will receive a match contribution.
Employers contribute 3% of compensation, regardless of employees’ 401(k) deferrals.
Example: Rhonda earns $50,000. She receives a contribution equal to 3% of her compensation.
(3% x $50,000)
$1,500 = Total
Note: Employees receive this contribution even if they aren’t deferring or participating in the 401(k) plan.
Check out our other retirement services and plans for planning a perfect retirement. For more information please read our FAQs, and if you still have further questions, feel free to contact us. You can also contact Sheree Tallerman, the CEO of PlanPerfect, Inc. at 949-223-8397 or [email protected].
4001 MacArthur Boulevard, Ste. 102
Newport Beach, CA 92660
949-223-8397
[email protected]
www.planperfectretirement.com
