Business

How Your Business Benefits from a Safe Harbor 401k Plan

Whether you run a small business or a massive enterprise, you need to find ways to attract and keep employees. There are many ways to accomplish this feat, but one of the best perks that a company can offer to its workers is an excellent retirement plan.

When it comes to choosing a retirement plan, you have many options. For instance, an IRA might be a good choice for some businesses. However, in many cases, the benefits that a 401k plan provides to a business outweigh many of the other retirement plan options.

That being said, 401k plans are subject to many rules and regulations, one of these being fairness for all contributing employees. In order to ensure that 401k retirement plans are fair within companies, the IRS runs three tests every year. These tests are, specifically:

  1. The Actual Deferral Percentage Test.
  2. The Actual Contribution Percentage Test.
  3. The Top Heavy Test.

While each of these tests is slightly different from the others, they all, essentially, seek to determine whether the higher earners within a company are being favored over lower earners with regard to their retirement plan.

A Safe Harbor 401k plan provision can effectively protect companies from the possibility of failing any or all of these tests.

How a Safe Harbor Plan Protects Companies and Employees

As a business owner, you’ve got a lot of things to think about every day. But with a safe harbor provision in place, you won’t have to spend any time worrying about whether or not you’ll get in trouble with the IRS.

Safe harbor plans work by requiring companies to match employee contributions in one of a few different ways. Some of the most popular matching options are:

  1. Nonelective contributions. When it comes to nonelective contributions, employers must make contributions to every employee’s plan, whether said employees decide to contribute to their own plan or not.
  2. Basic or enhanced matching. With basic or enhanced matching, how much an employer contributes to an employee’s plan is based on the amount each employee contributes to his or her own plan. For instance, with basic matching, an employer will have to match 100% of an employee’s contributions, at as much as 3% of their salary. With enhanced matching, the employer matched 100% or more of the employee’s contribution at as much as 4% of their earnings.

Whichever method a company elects to use for their 401k will depend largely on the needs of their business. Matching and nonelective contribution methods can both be good options, depending on the specifics of the company’s financial situation.

Deadline for Setting Up a Safe Harbor 401k

If you think a Safe Harbor Plan sounds like the perfect option for your business, you’ll want to act quickly. Setting up a new Safe Harbor plan must happen before October 1st of 2022.

On the other hand, if you only wish to add a Safe Harbor Provision to a plan that is already in place, you have until November 30th, 2022.

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