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401k safe harbor1/6/2024 If the IRS determines your plan to be top-heavy, you’ll be required to make contributions (up to 3% of the employee’s salary or equal to the highest contribution made by a key employee, whichever is lower) to bring the plan back into balance. Small- to mid-sized firms risk failing nondiscrimination testing since there’s a skewed ratio of officer positions to lower-level employees. An income of $200,000 or more while holding an officer position.Ownership of 1% or more of the company AND earnings of $150,000 or more annually from said company.Per the IRS, a company-sponsored plan is considered “top-heavy” when “key employees” own 60% or more of the assets within the plan. Businesses that fail to meet these requirements are susceptible to costly penalties and may be forced to make corrective distributions. These tests ensure that company-sponsored 401k plans align with Employee Retirement Income Security Act (ERISA) requirements. To ensure that all employees in a company-whether it’s an entry-level administrative assistant or the CEO-can save for their retirement in an equitable manner, the IRS conducts regular 401k nondiscrimination testing. So which benefits package is better for you and your employees: a traditional 401k or a safe harbor 401k plan? Let’s dive into the details and find out… What Is a Safe Harbor 401k? Introduced by the Small Business Job Protection Act of 1996, a safe harbor 401k involves mandatory employer contributions, and when structured correctly, aren’t subject to nondiscrimination testing. The safe harbor 401k was developed to alleviate this issue. It’s common for companies with “top-heavy” 401k plans to run afoul of the Employee Retirement Income Security Act (ERISA), especially smaller firms where HCEs (Highly Compensated Employees) may make up a significant portion of the staff. By shielding your company from nondiscrimination testing, a safe harbor plan allows employees (and employers) to maximize their retirement savings, thereby saving on taxes.Īs a business owner, are you interested in offering a 401k plan to your employees? Wondering which type of 401k plan is best for your company? Concerned that you might invest the time, energy and money to set one up, then end up being the only one making contributions? Worried this means you won’t be able to meet compliance requirements and lose out on potential tax savings? These concerns are entirely valid! Setting up a safe harbor 401k plan can prove a wise business decision for many employers.
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