For workers, a standard 401 (k) plan Provides a straightforward and tax-efficient way to save for retirement, but for employers, setting up a 401 (k) plan is anything but simple. Companies that want to offer 401 (k) savings plans to their employees should ensure that they do not follow complex government regulations.
a key Regulation for most 401 (k) plans There is a need for annual disarmament tests designed to prove a plan that does not unfairly favor some employees. “The purpose of a safe harbor plan is to exempt trade (s) from those tests,” says Allison Brecher, general counsel and chief compliance officer for Westwell, a general retirement platform. By establishing a secure port 401 (k), a business can provide its employees with the same tax benefits As a regular 401 (k) plan, but omit annual annual testing requirements.
Read on to learn more about safe harbor 401 (k), including how they are set up, how they meet government requirements and benefits Employer-matching contribution.
What is a Safe Harbor 401 (k)?
Before you know the basics of safe harbor schemes and how to structure them, you must understand the government’s non-governmental test for regular 401 (k) accounts.
These tests analyze the savings rates of highly compensated employees compared to non-compensated employees. For 2020, a highly compensated employee is classified as an employee earning more than $ 130,000 annually or someone who has more than 5% interest in the business during the previous year.
Under these tests, there may not be a major discrepancy between groups as to what they are depositing in their 401 (k) accounts. For example, with the Actual Deferral Percentage Test, or ADP test, if non-compensated employees are putting an average of 4% of their income into their retirement plan, highly compensated employees will accumulate 6% of their income. Will be limited.
The tests required by the government also evaluate whether the account contribution is top-heavy. To do this, the tests compare the fund assets of key employees to everyone else. A key employee is defined as the owner or officer of the business. If key employees in a scheme hold more than 60% of their assets, it is considered top-heavy and may require corrective action.
“If you fail the test, you ultimately want to give (contribute) back to highly compensated employees,” says Eric Christenson, retirement planning consultant with Canby Financial Advisors in Framingham, Massachusetts. Employers may also be required to contribute 3% for all their other employees.
“The purpose (of testing) is to ensure that the plan is introduced to a cross section of highly paid employees and non-paid employees,” Brecher explains.
How a Safe Harbor 401 (k) Sidesteps an IRS Nondiscussion Test
With a regular 401 (k), a company must pass the nondiscasion test every year, but plans that follow the safe harbor framework are assured to meet government requirements. What’s more, owners of excessive compensation do not have to worry about their contribution capped by the ADP test.
“As an employer, you want to avoid limitations on contributions,” says Chris Keller, partner of Kingman Financial Group in San Antonio, Texas. With a safe harbor 401 (k), everyone can contribute up to $ 19,500 in 2020, and people 50 and older can earn an additional $ 6,500. Catch up contribution.
The business is closed The company has to make mandatory contributions to employee 401 (k) accounts, and this money becomes vested immediately. For a large company, this can be an expensive proposition, but a small business may find that it is more cost-effective to make retirement contributions to deal with the cumbersome disarmament test. Safe harbor 401 (k) plans are generally less expensive than traditional plans.
Types of Safe Harbor 401 (k) Plans
Safe harbor 401 (k) plans can be set up with or without a match. Depending on which option an employer chooses, a plan is considered one of the following:
- None Safe Port: With these plans, employers make a 3% retirement contribution for all workers, regardless of who they choose to participate in the plan. “You can almost think of it as a profit-sharing plan,” Christenson says.
- Original Safe Port: Also known as an alternative safe harbor, the scheme will match up to 3% to 100% of an employee’s contribution and then 50% of the employee’s additional contribution, up to 5%.
- Enhanced Safe Harbor: As another type of alternative plan, enhanced safe harbor 401 (k) plans are found or offered in a basic plan. Typically, they provide 100% of matches up to 4% of the employee’s contribution.
“We recommend the match (to customers) because it encourages employees to put in their retirement,” Christenson says. However, business owners should consult with a financial professional in 401 (k) accounts to determine which option is best for their needs.
Tax Benefits, Employee Safe Harbor 401 (k) Benefits
Provides a secure port 401 (k) Significant benefits For workers, including automatic employer contributions to their retirement funds, potential tax deductions and immediate vesting.
In 2020, employees can deduct up to $ 19,500 from their taxable income for contributions to any type of traditional 401 (k) plan. Workers age 50 and older are eligible for a total deduction of $ 26,000. Those who opt for a Roth 401 (k) account do not receive an immediate tax deduction, but their retirement funds become tax-free and the money can be tax-free after the age of 59 1/2 .
Another benefit for workers is that employers are contributing immediately to Safe Harbor 401 (k) plans Contained. With a standard 401 (k), an employee may have to work a certain number of times before they have full access to this money, but no such long pre-determined time schedule is with most safe harbor plans.
This means that the money deposited in a safe harbor 401 (k) plan is for employee retention, no matter what. “It’s free money, and it’s free now and forever,” Brecher says.
How to start a safe harbor 401 (k)
Employers who want to open a safe harbor 401 (k) plan should receive professional guidance. Some companies, such as Westwell, offer free consultation to business owners, but others may charge for the service. Even though the owner of a business has to pay, it is well spent money according to the breaker.
Accounting firms and payroll providers have traditionally acted as plan administrators, but online solutions are gaining popularity. Another option is to get help from an advisory firm that can determine how the retirement plan fits into the larger picture of the company’s finances and goals.
No matter who is an accountant, Financial advisor Or any other professional helping to establish the plan, its official documentation must indicate that it is a safe harbor 401 (k). Existing plans can only be converted into a safe harbor at the beginning of a new year, and the decision to convert to a safe harbor plan must be reported 30 days in advance.
The Security Act, passed in 2019, now makes an ideal time to consider establishing a safe harbor 401 (k), Breaker says. The law includes some important tax credits that can cover the costs of administering a plan for three years.
A secure port 401 (k) is a favorite Retirement plans for many small businesses. Not only do these savings accounts make it easier for company executives to meet government regulations, they also ensure workers receive a minimum contribution towards their retirement, making it a win for employers and employees alike. Huh.