Key Takeaways:
- Safe Harbor 401(k) plans automatically satisfy non-discrimination testing rules.
- Safe Harbor 401(k) matches are typically 100% tax deductible. ^
- Safe Harbor 401(k) plans allow you to contribute the maximum annual deferral amount ($22,500) to your own 401(k) plan without restrictions. ^^
- Allows you to receive additional savings from your company's matching contributions (you're an "employee" too)
- The deadline to start a Safe Harbor 401(k) plan is October 1st, 2023.
What is a Safe Harbor 401(k)?
Safe Harbor 401(k) plans enable small business owners to contribute the maximum amount of their annual income into a tax-deferred retirement account and automatically satisfy government required non-discrimination compliance tests. While some businesses are concerned with the cost of providing a match, it is typically 100% tax deductible. It is more of a cash flow consideration for the business of whether to provide a regular matching contribution.
The Safe Harbor plan allows you to:
- Contribute the maximum annual deferral amount ($22,500 in 2023) to your own 401(k) plan
- Avoid the hassles by automatically satisfying IRS non-discrimination testing that all employee-based 401(k) plans must pass
What are the benefits of a Safe Harbor 401(k)?
- Safe Harbor 401(k) plans enable small business owners and any highly compensated employee (those earning over $150,000 per year) to contribute the maximum amount of their annual income into a tax-deferred retirement account without restrictions. If not a Safe Harbor 401(k) plan, owners, and highly compensated employees (HCE) are restricted on how much they may contribute based on the average deferral rate for non-highly compensated employees (NHCE) in the plan. For example, if NHCEs are putting 3% of their salary into the plan, HCEs may only defer up to 2% more, or 5% of their salary into the plan which may be much lower than $22,500 allowed.
- Your business can deduct all matching contributions (Within the deductibility limitations imposed by the IRS) to employee accounts. And don't forget, matching contributions help increase employee retention, and are a great recruiting tool for prospective hires.
- You automatically satisfy non-discrimination testing.
Safe Harbor 401(k) Deadlines
There are two deadlines to be aware of:
- The first is in August or September – as it typically takes 401(k) providers a few weeks or more to get this type of plan set up before the government-imposed deadline (some require up to a month). FYI, some providers stop accepting new Safe Harbor 401(k)s 30 to 45 days or earlier from the proposed IRS deadline of October 1st.
- The second is October 1st, the government-mandated deadline to have a Safe Harbor 401(k) plan in place for a business running a calendar fiscal year. So, get your questions answered and plan purchased before this date if you are ready to start taking advantage of the tax and savings benefits Safe Harbor 401(k)s offer.
How is a Safe Harbor 401(k) different from other 401(k) plans?
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 companies with a traditional 401(k) plan that offer no match, a vesting match, or a lower match than Safe Harbor requirements, 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 401(k) saves the day for businesses that go with this plan type.
Who benefits the most – business owners or employees – with a Safe Harbor 401(k)?
- It lowers personal taxes in the current year for the owner and each employee who make tax deferred contributions.
- Owner and employees also benefit from receiving the match.
- Your business can 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.
If your business has a lot of seasonal workers or uneven income streams that make a Safe Harbor 401(k) difficult to support for your business, there are ways to design Traditional 401(k) plans with auto-enrollment or profit sharing to help ensure you can fully benefit from the plan.
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. 401(k) tax credits can cover most all a 401(k) provider's costs for three years when starting a 401k plan for your small business.* The credits generally covers 100% of 401(k) set up and administrative costs for businesses with 1-50 employees and half the costs for those with 51-100 employees. Plus, their are tax credits and deductions that may be applied to employer contributions too. As you can see, it doesn’t have to cost much to offer 401(k) benefits for your business.
How Can We Help?
Choosing the right 401(k) plan for your small business can be challenging. Give us a call - we’ll take the time to learn about your business and help you find the right plan to achieve your retirement goals.
For more info and FAQs, you can also visit our Safe Harbor 401(k) page. Happy saving!
^ Tax & legal advice: ShareBuilder 401k does not offer tax or legal advice. Consult with your tax or legal advisor before engaging in specific strategies.
^^ The maximum contribution for an employee participant in 2023 is $22,500 ($30,000 if 50+ years of age).
*View important disclaimers on price comparison vs. the industry, promotion timing and rules, and how 401(k) tax credits work.