What Are Safe Harbor Plans In A 401K Investment Plan?

Know the tricks of the trade! Safe harbor 401(k) tips for small business owners.

Sometimes it seems like small business owners are at a disadvantage when it comes to hiring and retaining top talent. Larger corporations have a size advantage that allows them negotiate lower costs for employee benefits, which typically enables them to offer better packages and lure workers away from smaller businesses. This makes it even more important for small businesses to make full use of every advantage available to them.

Safe Harbor 401(k) Plans

Safe Harbor 401(k) plans offer small business owners a way to offer retirement plans to their entire staff in a way that encourages broad participation by giving all employees equal benefits in the plan. A safe harbor 401(k) plan benefits the employer because it lowers the amount of administrative paperwork that a company must file. Under normal 401(k) plans, a company must prove each year that their plan does not discriminate between low paid and higher paid employees. The minimum benefits of the plan ensure that it is fair.

Safe Harbor 401(k) Benefits

A safe harbor 401(k) must provide three specific benefits to all employees:

1. The employer must make contributions to the accounts of all “non-highly compensated” employees which is equal to 3% of that employees’ compensation. The company can choose not to do this for highly compensated employees.
2. The 3% contributions are considered to be fully vested no matter how long an employee has worked for the company. In exchange for this, the 3% contributions cannot be withdrawn by the employee before they leave the company.
3. The company must give the employees an annual report on the 401(k) to ensure that the plan and its benefits are understood.

If the employer offers matching, they must offer a 100% match for up to 3 percent of compensation and a 50% match for all contributions between 3 and 5 percent of salary.

As a small business, safe harbor plans offer a great opportunity to cut down on paperwork while attracting top-class employees.

Related posts

1. Are All 401K Plans Created Equal?
2. How Much Should I Take Out For 401K?
3. 401k Benefit: What are they and is it good for me?
4. What Is a 401k Retirement Plan?
5. What Is 401K Forfeiture?

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