All businesses deserve to have a retirement savings plan that can support all employees by maximizing the employer’s contributions. Small business owners can set up a Safe Harbor 401(k) retirement plan to enjoy huge benefits that can also be shared with all participating employees and highly compensated top-level executives. The Safe Harbor 401(k) plan allows you to skip the hassle of conducting administrative tasks associated with annual IRS testing since this plan is deemed to pass the non-discrimination compliance testing.
What is a Safe Harbor Plan?
A Safe Harbor plan is a 401(k) retirement savings option for small businesses. It allows the owner to maximize their contributions to the plan while still being compliant with the yearly IRS annual non-discrimination testing. The employer is required to make minimum contributions to the Safe Harbor 401(k) plan as a trade-off for passing the IRS testing. These contributions should be made annually by the business owners and should be vested immediately.
Key Aspects of Safe Harbor Plan
This plan is deemed to have passed the ACP and ADP IRS compliance tests if the retirement options offer equal benefits to all the employees. If the employer’s 401(k) plan differs from Safe Harbor, and fails the IRS annual tests. In such a case, the business owner has the responsibility of returning a portion of the contributions made to the top-level executives or make additional contributions to the non-highly compensated participating employees.
Safe Harbor Plans are specially designed to meet ACP and ADP test requirements, proving that this plan does not discriminate between the employees by offering a higher advantage to the highly compensated employees. Moreover, suppose the only contributions the owner makes to the Safe Harbor 401(k) plan are the employee deferrals and the plan’s own contributions. In that case, this retirement plan also gets exempted from IRS top-heavy correction requirements.
Plan Provision Deadlines for Safe Harbor Plan
IRS requires employers to have the plan in place for a minimum of 3 months whenever a new 401(k) retirement plan is being adopted. Hence, if you want to include Safe Harbor provisions in your retirement plan this year, you should begin the plan before October 01st, 2021. In order to ensure a smooth set up and completion of all administrative tasks, it is suggested to contact the plan provider no later than September 25th, 2021.
If you already have a retirement plan and are looking to add Safe Harbor provisions to your existing 401(k), you can do that before the start of the plan year. It is necessary to inform your employees 30 days in advance in such cases. Thus, if your plan starts on January 01st, you have to request to add the Safe Harbor provisions to your plan no later than November 30th. It is important to note that Safe Harbor provisions cannot be eliminated or changed at any time of the year except if the plan gets completely terminated. In case the plan ends for any reason, the Safe Harbor contribution will be applied till the date of termination.