It’s time to establish your Safe Harbor 401(k) Plan!

Tuesday, September 03, 2013

By Caroline Harless and Wes Littlejohn, CPA

The deadline to set up a Safe Harbor 401(k) is approaching – for this year it is October 1. If you are a business owner with highly compensated employees that would like to maximize their 401(k) contributions, you may want to consider a Safe Harbor 401(k) Plan.

In many companies, Highly Compensated Employees (HCEs) might desire participating in a retirement plan to which they contribute the maximum annual deferral amount – this is $17,500 or $23,000 for those aged 50 and older.  At the same time, Non-Highly Compensated Employees (NHCEs) might prefer to contribute at a lower rate. This can be a problem because the plan must pass discrimination testing that helps NHCEs benefit as much as HCEs.

A Safe Harbor 401(k) Plan makes it easier for the business owner and HCEs to contribute the maximum amount regardless of what other employees chose to do.  Here are the common options:
  1. The simplest and most commonly used option is the non-elective contribution of 3% of annual compensation for everyone.  
  2. The Safe Harbor also allows for matching contributions as an alternative under acceptable formulas.

The Safe Harbor Plan has numerous advantages over traditional 401(k) plans for business owners. It helps to satisfy non-discrimination testing because it stipulates that the business owner contributes to the 401(k)s of both the employees and the business owner. With a traditional plan, HCEs can only contribute 2% more than the average contribution, but with a Safe Harbor Plan, what other employees are contributing is irrelevant. Contributions are still completely tax deductible.

It is important to note that businesses must contribute to employee and owner 401(k)s throughout the year, so the funds to do this must be readily available. If year-round contributions make sense for your business, then a Safe Harbor 401(k) Plan might too. This type of retirement plan is ideal for small business owners who want to contribute at a maximum and at the same time, keep employee costs down.

If you are interested in setting up a Safe Harbor Plan, talk with a tax accountant soon to make sure you have everything in place before the 2013 deadline.

Caroline O. Harless is a General Partner of Harless & Associates as well as the co-founder, president and CEO of the affiliated financial services firm, Peachtree Capital Corporation.

Wes Littlejohn, CPA serves as Vice President of Peachtree Capital Corporation and is a CERTIFIED FINANCIAL PLANNER™ practitioner.