Safe Harbor 401(k) Plans

 

Advantages of having a Safe Harbor 401(k) Plan:

A Safe Harbor 401(k) plan works very much the same way as a traditional 401(k) plan. Employees can choose to defer some of their salary and invest it into the plan.  The deferred money generally does not get taxed by the federal government or by most state governments until it is distributed. Unlike a traditional 401(k), a Safe Harbor plan is not subject to the annual nondiscrimination tests that a traditional plan must comply with. Employees may contribute more to this plan than under IRA plans and are permitted to choose their investments. 401(k) plans allow for participant loans and hardship withdrawals which add flexibility for employees.

 

Who adopts a Safe Harbor 401(k) Plan?

Businesses of all sizes can establish a safe harbor 401(k) plan.  Safe harbor plans are attractive to any business owner that wants to avoid complicated non-discrimination testing and maximize their own tax deferred contributions to the plan. The Go401k Group offers a Safe Harbor administrative discount.

 

Highlights:

Under a Safe Harbor 401(k) Plan, an employee can elect to defer some compensation.  But unlike a regular 401(k) plan, the employer must make either:

• A dollar-for-dollar match up to 3% of each employee's pay plus 50 cents on the dollar for the next 2% of pay, or

• A non-elective contribution of 3% of each eligible employee's pay.

With a Safe Harbor 401(k) plan all employer matching contributions, and non-elective contributions, are considered fully vested when made.

 

If you establish a Safe Harbor 401(k) plan, you:

• Can have other retirement plans.

• Can be a business of any size.

• Need to annually file a Form 5500.

 

Pros and Cons:

• Greater flexibility in contributions.

• Employees may contribute more to this plan than under IRA plans.

• Good plan if cash flow is an issue.

• Optional participant loans and hardship withdrawals add flexibility for employees.

• Additional withdrawal and loan flexibility adds administrative burden for the employer.

 

Who Contributes:  In a Safe Harbor 401(k) plan contributions are made through employee salary deferrals and/or employer contributions.  Employees are always 100% vested in their salary deferrals.  Employer contributions may be vested on a graduated vesting schedule.

 

Contribution Limits:
Employee - $16,500 in 2011.  If the employee is aged 50 and over, an additional catch-up contribution is allowed.  The additional contribution amount is $5,500 for 2011.

Employer/Employee – The lesser of 25% of compensation or $49,000 in 2011.

 

Filing Requirements:  Annual filing of Form 5500 is required.

 

Compliance Testing: Plan is not subject to annual non-discrimination testing.

 

Participant Loans:  Permitted.

 

In-Service Withdrawals:  Yes, but subject to possible 10% additional tax if under age 59-1/2.