Safe Harbor 401(k) Plan

One of the most popular retirement plans for a small business owner is the Safe Harbor 401(k) Plan.

What is a Safe Harbor 401(k) Plan?

A Safe Harbor 401(k) Plan is a qualified defined contribution plan similar to a Traditional 401(k) Plan. These plans allow employees to defer compensation for retirement along with giving the employer the opportunity to contribute to the plan as well. Employees can elect to defer compensation on either a pre-tax or after-tax basis, known as Roth 401(k) deferrals. The manner in which the compensation is deferred determines whether the earnings of the plan are on a tax deferred (Traditional) or tax free basis (Roth).

How much can I contribute to a Safe Harbor 401(k) Plan?

The amount you can contribute to a 401(k) plan may vary from year to year depending on the guidelines set forth by the Internal Revenue Service. For 2012, the maximum contribution an employee can defer into a 401(k) plan is $17,500 (indexed). This limit is per taxpayer and any 401(k) contributions withheld for the taxpayer by any employer must be aggregated to ensure the taxpayer does not exceed applicable limits each tax year.

For taxpayers who have attained age 50 or older, a catch-up contribution is allowed each year. The contribution may change from year to year similar to the limits on 401(k) contributions. For the 2012 plan year, the catch-up contribution is $5,500 (indexed) thus a total of $22,500 is allowed for an individual age 50 or older.

Are employees required to contribute to the plan?

An employee is not required to participate in the plan. However, the employer may elect to adopt automatic enrollment provisions to promote participation in the plan. The automatic enrollment provisions require the employer to enroll all employees into the plan at a specified percentage unless the employee elects to contribute a different amount or opts out of participation.

Is the Employer required to contribute to the Plan?

An employer is required to make a contribution to the plan on behalf of the participants either on a matching basis or a non-elective contribution to all eligible employees. The safe harbor contribution made each year by the employer must be disclosed to the participants prior to the beginning of each plan year and is 100% vested. As a benefit to the employer, the plan is exempt from certain non-discrimination testing. This allows the highly compensated employees the opportunity to maximize their contributions to the plan without the risk of receiving refunds from the plan.

How does an employee receive their money from the plan?

Employees can receive a distribution from the plan in a number of ways. Funds can be received via plan loans, hardship distributions, in-service distributions, required minimum distributions or distributions due to termination or retirement. Of course, the preferred distribution would be due to retirement. The provisions of the plan set forth by the employer will explain the options for receiving a distribution from the plan.

What is required to administer a Safe Harbor 401(k) Plan?

A Safe Harbor 401(k) plan is required to have a written plan document. This document is drafted by your third party administrator and executed by the employer. In addition to the plan document, the plan is required to be tested on an annual basis to insure the plan passes all the nondiscrimination rules set forth in the Internal Revenue Code. A Form 5500 must also be filed electronically with the Department of Labor on an annual basis. If the employer has more than 100 employees eligible to participate in the plan, an annual audit of the plan is also required by an independent auditor.

What are the first steps to getting a 401(k) plan started?

If you are interested in exploring a Safe Harbor 401(k) plan for your company, please contact Resource Benefits Administrators at (254) 776-6214 or (512) 342-1652 and a representative will assist you with your questions and the procedures needed to get your plan established.

3415 Greystone Drive, Suite 205
Austin, Texas 78731
(512) 342-1652
5400 Bosque Blvd, Suite 500
Waco, Texas 76710
(254) 776-6214

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