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Learn Why Safe Harbor 401(k) Plans Are the Best Fit for Most Small Businesses and Beat the Annual Deadline Too

By Stuart Robertson

For many small business owners on solid footing, it’s difficult to find a second to consider a 401(k) plan and which plan design will work best for their company. So, it’s not surprising that many owners miss the deadline to start a special, simple-to-manage 401(k) plan referred to as a “Safe Harbor 401(k).” It is the most popular plan type purchased by small businesses for several reasons. Here’s a quick Q&A with important facts to know.

What is the Safe Harbor 401(k) Plan Deadline?
There are two deadlines to know. The first is October 1st, the government-mandated deadline to start a Safe Harbor 401(k) plan for a business running a calendar fiscal year.

The other is September 25th – as it typically takes 401(k) providers five or more days to get this type of plan set up before the government-imposed deadline (some require a month). So, get your questions answered and plan purchased by September 25th if you are ready to start taking advantage of the tax and saving benefits Safe Harbor 401(k)s offer. And if you are considering a plan now, ShareBuilder 401k is offering a discount off setup for those that purchase before September 12th.

What is a ‘Safe Harbor’ 401(k) plan? How is it Different from other 401(k) plan types?
Safe Harbor plans enable small business owners and other highly compensated employees (those earning <$130K in 2020) to contribute the maximum amount of their annual income into a tax-deferred retirement account and also automatically satisfy government required non-discrimination compliance tests. It requires an immediately vesting employer matching contribution. The ability to save more without the potential for compliance hassles makes it the popular choice for small businesses and many larges ones too. While some businesses are concerned with the cost of providing a match, it is typically 100% tax deductible, so it’s a cash flow consideration.

By providing a ‘Safe Harbor’ qualifying match – the amount an employer puts into an employee’s 401(k) account as a percentage of an employee’s salary – any employee including the owner can give the maximum to the plan and receive the match.

401(k) plans must be run in the best interest of employees. Frequently in smaller companies with a traditional 401(k) plan that offers no match or a very low amount, the more highly compensated employees (such as owners) are restricted on how much they can contribute to the plan if employees don’t contribute a high enough percentage of their salaries (on average) to the plan. Essentially the U.S. Government wants to ensure that 401(k) plans do not favor “highly compensated employees” over non-highly compensated employees.

The government has established required compliance tests to verify all employees have fair representation in a plan. That’s where the Safe Harbor saves the day for businesses that go with this plan type.

What is the maximum annual amount that an owner can contribute to a 401(k)?
In 2020, it’s $19,500 and $26,000 for owners who’ll be age 50 or older by the end of the year. When you consider employer contributions to each employee's account, the limit on both is $57,000 or $63,500 if you are 50 plus.

Who benefits the most – business owners or employees – with a Safe Harbor 401(k)?
Both. It lowers personal taxes in the current year for the owner and each employee that contributes tax deferred. Owner and employees also benefit from receiving the match. Lastly, the business is able to report any match as a tax-deductible expense (typically 100% deductible as mentioned above) to minimize this cost to the business for providing retirement plan benefits.

Any other important info to know?
Any business with a headcount below 100 employees and opening their first 401(k) plan can also receive a tax credit up to $15,000 for the first three years of the plan to offset setup and/or administration costs. It needn’t cost much to run 401(k) benefits for your business. For more info and FAQs, visit our Safe Harbor 401(k) page. Happy saving!


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