What Do You Need to Set Up Safe Harbor 401(k)?
by Arina Smith Financial Planning 07 November 2020
A well-designed 401(k) plan can help you in attracting new talent and retaining your existing employees. Safe Harbor 401(k) retirement plans are common with business owners as it allows highly compensated employees as well as owners to maximize their contributions while legally bypassing the IRS annual requirements of nondiscrimination testing. A 401K provider, Ubiquity, has some additional information on what you’ll need to get started on Safe Harbor.
Benefits of using Safe Harbor Plan
The major benefits of selecting the Safe Harbor plan are:
- By adding Safe Harbor provisions, your highly compensated employees benefit from the plan as they are more likely to maximize their retirement contributions.
- Your plan is exempt from the annual IRS compliance testing.
- As you contribute maximum amounts to your own 401(k) plans, it optimizes your own and your highly compensated employee’s retirement savings.
- Your taxable income is reduced as the employer contribution is tax-deductible
- Provides a guarantee to the business owners, or highly compensated employees that they can maximize their plan contributions.
Determine if Safe Harbor is for your Business
If you are a business owner looking at rewarding your owners, as well as employees with a higher retirement contribution while legally bypassing the expensive non-discrimination testing required by the IRS that is expensive and requires completion of administrative tasks, then the Safe Harbor 401(k) might be for you.
Here are some scenarios under which Safe Harbor 401(k) can be the ideal retirement plan for your business.
Small Businesses with non-participating employees:
If you are a small business or a recent startup where the employees are not participating, then the Safe Harbor contributions are ideal for you. The highly compensated employees can maximize their 401(k) contributions even if the other employees are non-participating. You as an employer can pass the IRS compliance testing even after adding a profit-sharing component.
Top Heavy 401(k) plan:
If owners and high-level executives are putting in more than 60% of their total assets into the plan, safe harbor plan rules allow employees to maximize their contributions without any penalty.
Businesses who have failed the non-discrimination testing:
If you are a business who has failed at the IRS annual compliance testing then by adding a safe harbor provision to your 401(k) retirement plan, you can show that you are offering a fair opportunity to all your employees for retirement savings, without thinking about any of the penalties, refunds as well as the administrative task if you potentially fail the test.
Skip IRS annual compliance testing:
By contributing to a Safe Harbor plan on behalf of your employees, you are ensuring that everyone in the company benefits fairly from the plan. This deems you as passing the IRS compliance testing and you are saved from the expenses and administrative hassle of completing the IRS annual nondiscrimination testing. Also, the employer contributions made to the Safe Harbor plan are tax-deductible.
Thus, if you are a business owner looking to keep your employees happy while benefiting from tax savings and not worrying about failing the crucial IRS testing every year, then the Safe Harbor 401(k) is a good retirement savings option for you.