With tax season behind us, companies might be thinking about how to take advantage of additional incentives for the current year. While offering a retirement plan can be a huge benefit for a number of reasons, a safe harbor 401(k) plan can be a particular win-win. Not only does a safe harbor plan help maximize tax savings and retain employees, but it also simplifies responsibilities for the employer.
A safe harbor is like a traditional 401(k), but the employer must contribute, and contributions become fully vested when made. Contributions can either be limited to employees who make deferrals or offered to all eligible employees.
Unlike traditional 401(k) plans, safe harbor plans automatically pass a number of required tests in order to keep your plan tax-qualified and avoid other penalties and costs. These plans can be a great choice for small businesses that may have trouble passing nondiscrimination testing. For example, a family-owned or small business with more highly compensated employees relative to "rank and file" or non-highly compensated employees may otherwise have difficulty passing compliance tests.
The business owner can contribute the maximum annual deferral amount to his/her own 401(k) plan ($20,500 for 2022 plus any catch up contributions), receive additional savings from the company's matching contributions (they're an "employee" too) and, come tax time, deduct applicable employee and employer matching contributions from the company.
Safe harbor plans must be in effect three months prior to the plan year-end date, which means eligible employees must be able to make salary deferrals starting no later than the first pay date on or following October 1. But be sure to leave time to get your plan up and running so you can give employees long enough to evaluate and make elections before their first payroll.
If you already have a different type of plan, not to worry. You can always amend your offering to take advantage of safe harbor benefits, but there are some important dates to know:
Overall, there are benefits to any type of retirement offering, but a safe harbor plan can be a smart decision for many companies, particularly small business owners. If you have any questions about whether a safe harbor plan is right for you, reach out to firstname.lastname@example.org any time.