401k safe harbor2/28/2024 ![]() In a Basic Safe Harbor 401(k), employers can contribute 100% of the first 3% of each employee’s contribution and 50% of the next 2%.In a nonelective Safe Harbor 401(k), employers contribute 3% of matching contributions and it is immediately vested.There are four ways to set up a Safe Harbor match: Safe harbor 401(k)s allow for immediate vesting of contributions, meaning ownership of contribution is immediately transferred to employees without vesting periods. By implementing a Safe harbor 401(k), businesses can help highly compensated employees reach the maximum deferral limits. The maximum deferral limit in Defined Contribution Plans is $19,500. Therefore, if the remaining employees of a firm make an average investment equal to 3% of their annual salaries, highly compensated employees cannot contribute more than 5% of their salary to their 401(k) by law. The general rule is that highly compensated employees cannot contribute more than 2% more than average of all employees. This is because they set artificial limits on the percentage of their compensation that such employees can contribute to their plan. The nondiscrimination tests can end up adversely affecting retirement savings for senior executives and highly-compensated employees or employees who earn more than $130,000 annually, as of 2020. The ADP ensures that deferred salaries for all employees are equal to the same percentage of their annual compensation while the ACP ensures that the employer’s contribution match, in terms of salary percentage, is equal to that of the employee. In a traditional 401(k), employers must perform annual tests known as Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP). Have questions about Safe Harbor 401(k)s? Click here. They are also administratively more complex as compared to traditional 401(k) and require a careful assessment before they are implemented. ![]() ![]() The disadvantage of Safe harbor 401(k)s is that they may end up costing employers much more than a traditional 401(k). The advantages of Safe harbor 401(k)s are that they allow flexibility in maximum contribution limits, provide tax benefits and help employers avoid noncompliance tests. The test ensures that employers make equal percentage salary contributions to all employees and avoid discriminating against employees with low salaries.ĭepending on percentage of the employer’s matching contribution, Safe harbor 401(k)s come in four flavors: nonelective, basic safe harbor, QACA, and enhanced safe harbor. Safe harbor 401(k)s are retirement plans, that are variants of traditional 401(k)s, designed to pass the IRS’s nondiscrimination test.
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