Definition and Example of a Safe Harbor 401(k) Plan
A Safe Harbor 401(k) plan is a type of retirement plan that helps small business owners comply with the non-discrimination testing conducted by the Internal Revenue Service (IRS). It is a way to organize a plan that passes the test automatically or avoids it altogether.
How Does a Safe Harbor 401(k) Plan Work?
The IRS can deny a contribution to a retirement plan if it deems it excessive. If the employer does not rectify the situation, the plan may lose its tax-qualified status. The plan can be fixed by reducing the allowable contribution to the minimum possible. This will align high-paid employees with employees who are not fully active. The other way is to recharacterize the excess contributions of high-paid employees as taxable income.
How to Set Up a Safe Harbor 401(k) Plan
You can search online or seek advice from other business owners or financial professionals in your area to suggest retirement plan providers who can help you set up a 401(k) plan or a customized retirement plan for your small business.
Provisions of the SECURE Act
The SECURE Act was signed into law in December 2019. It increased the automatic escalation limit for employee contributions from 10% to 15%. The SECURE Act also allows companies to amend their plans to become Safe Harbor plans up to the 30th day before the end of the plan year. Later amendments may be permitted if non-elective contributions increase by at least 4% for all eligible employees. The plan must be amended by the last day to make excess contributions for the plan year. This is typically at the end of the following year.
Source: https://www.thebalancemoney.com/what-is-a-safe-harbor-401-k-2894205
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