SAFE HARBOR 401K plans are designed to allow employers to skip their annual 401k discrimination testing (All 401K plans yearly must show participants equally allowed and participating). Slightly different than automatic enrollment programs. Safe harbor 401k plans are beneficial if an employer would like to defer a high level of salary compensation without annual discrimination testing. This program is designed to ensure broad participation in the company plan and provide 100% vesting of the contributions. A form 5500 must be submitted yearly and the plan can be easily set up by us. Minimium amounts are also required by an employer to contribute. Employers must make a either specified matching contributions or a contribution that will be equal to 3% of employees eligible compensation to all participants. Failure to follow the proper procedures can incur substantial penalties from the I.R.S. or disqualification of the plans tax free status not to mention ill will on behalf of employees who may have to amend and refile taxes.
- Each non highly compensated employee must receive a dollar for dollar match on salary deferrals up to 3% of compensation and a 50¢ to the dollar match on salary deferrals from 3 to 5% of compensation.
- The rate of any matching contributions being made to highly compensated employees cannot exceed that being made to non highly compensated employees.
- The employer must provide annual information to employees explaining the 401K plans Safe Harbor provisions and benefits, including the Safe Harbors contributions cannot be distributed before termination of employment and that they are not eligible for financial hardship withdrawal.
- Employers can decide as late as 30 days before the end of each plan year whether or not to take the safe harbor route. However if as its safe harbor contribution, the employer wants to make matching contributions rather than the 3% of compensation contribution, the employer must define the matching formula well ahead of those 30 days; in fact any safe harbor matching contribution must be defined and communicated to employees no later than 30 days before the start of the applicable plan year so employees have plenty of time to adjust their contributions rates accordingly.
