Despite leading the world in most employment sectors, almost fifty percent of all workers in the United States do not have a retirement strategy in place. With the impending global recession, high inflation rates, and the cost of living growing exponentially, there is an immediate need for employees to consider a safe retirement plan so that they might be able to spend their post-retirement years in peace. Since only government jobs offer pensions, the best approach to ensuring a secure retirement is a plan that suits your annual financial requirements. Among the wide range of 401(k) plans available in the market, safe harbor 401(k) plans are quite popular. These plans provide an employer match to all eligible participants and, in return, allow businesses to circumvent the annual nondiscrimination testing performed by the IRS (Internal Revenue Service). Let us take a closer look at how safe harbor plans work and whether or not they are the right fit for your business.
About Safe Harbor Plans
A safe harbor plan is a type of 401(k) that guarantees a fixed employer contribution for all eligible participants. In return for this employer contribution, the participating employers get to avoid the annual equity checks performed by the IRS, which are better known as ‘401(k) nondiscrimination tests.’ The goal of these tests is to ensure that the 401(k) plans administered to the employees are equitable and function as intended, i.e., savings for the employees, not exclusive tax breaks for business owners.
How Safe Harbor Plans Work
By selecting a safe harbor 401(k), an employer innately satisfies the requirements of the nondiscrimination testing performed by the IRS to ensure equitable contributions. The plan is designed to help employees through its requirement for the business owners or employers to contribute a fixed amount to all their employees’ 401(k) plans. The term ‘safe harbor’ refers to the fact that the business owners can evade nondiscrimination testing once this plan is opted by all employees, and subsequently do not have to go through the administrative hassle in case the business fails the test.
Requirements for Safe Harbor Plans
One of the main requirements for these plans is for the employer to make a fixed, immediately vested contribution to their employees’ 401(k) accounts. Additionally, these plans can come in three forms of contributions, namely basic matching, enhanced matching, and non-elective contribution. In the first two types, the employees must deposit funds into their 401(k) accounts to become eligible for the employer contribution. On the contrary, the non-elective contribution does not have this requirement in place for employers to contribute. Safe harbor plans have identical deferral limits to all employer-sponsored plans, i.e., $20,500 annually for participants below 50 years and $27,000 for employees above 50 years of age. Under a safe harbor 401(k), employees can fully match their contribution limits, and employers do not have to worry about the IRS nondiscrimination testing.
If you are a business owner who plans to match their employee contributions without worrying about passing nondiscrimination testing and wish to help your employees build a fool-proof retirement fund, the safe harbor plan might be the perfect fit for you. These plans have the added benefits of tax savings, higher employee satisfaction, and talent retention.