Small business owners still have the chance to create a Safe Harbor 401k plan in 2015 and make a full contribution for the year.  But don’t wait.  October 1st marks the deadline for taking advantage of this type of plan, and it’s fast approaching.

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So what is a Safe Harbor plan and how is it different than a regular 401k?

A Safe Harbor 401k plan ensures that owners and other highly compensated employees can take full advantage of the 401k plan’s benefits.  In a typical 401k plan, owners and highly compensated employees can only use the plan to the extent that other non-highly compensated employees participate.  The plans are put through a series of tests called “nondiscrimination tests” to help determine what benefits, if any, the executives can take advantage of.  If the rank-and-file employees decide not to participate, then the executives don’t get to fully participate either.  It’s a measure that’s in place to ensure 401k plans benefit everyone, not just the executives of an organization.

A Safe Harbor 401k plan is essentially a workaround to this issue.  The plan structure ensures the company is providing enough benefits and incentives to encourage employees to participate, so if they still don’t, it’s ok.  The executives can still benefit from the plan.

There are several provisions that need to be in place for a 401k to be considered a Safe Harbor plan, but the most important consideration is which “employer contribution” schedule to choose.  You’ll essentially have three choices:

  1. Contribute 3% of each employee’s salary to their account regardless of their participation.  This is called a non-elective contribution, because the employees don’t actually have to contribute any of their own money to receive it.  They get it automatically.
  2. Match employee contributions using the following formula: 100% of the first 3% of an employee’s salary they contribute, plus 50% of the next 2% they contribute.  This means that employees contributing 5% of their salary will receive a 4% match from the company.
  3. Match employee contributions using the following formula, but automatically enroll everyone in the plan (meaning they have to actively opt-out, instead of opt-in):  100% of the first 1% of their salary they contribute plus 50% of the next 5% the contribute.  This means that employees contributing 6% of their salary will receive a 3.5% match from the company.

If you’re considering putting a retirement plan in place before the end of the year, or are currently having a hard time getting employees to participate in the one you already have in place, please contact us.  We’d love to work with you to help maximize the benefits of your plan.

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