Safe Harbor Profit Sharing 401(k) Plan

A 401(k) Profit Sharing Plan allows employees to take charge of their own retirement and defer a portion of their income to the plan while also allowing the employer to fund a matching and/or discretionary contribution. The employee salary deferrals are always 100 percent vested. They are limited to the lesser of 100 percent of the employee’s compensation or the current year’s dollar limit. Participants age 50 or older may make an additional “catch-up” deferral. These dollar limits are adjusted for cost-of-living increases.

A matching contribution may be included based on the salary deferrals. The matching allocation formula varies according to the employer’s funding objectives and may be discretionary.

Freedom to Maximize Your Contributions With a Safe Harbor Plan

Traditional 401(k) profit sharing plans require nondiscrimination testing to ensure that all employees are treated equally by the plan, however, it can limit the amounts that highly compensated employees can contribute. A “safe harbor” 401(k) plan is designed to eliminate the required testing and allow every participant to defer up to the maximum limits.

To satisfy the safe harbor rules, the employer must make a 100 percent vested contribution with one of the following two options: A 3 percent of compensation contribution to all eligible employees, or a matching formula equal to 100 percent of salary deferrals up to 3 percent of compensation and 50 percent of salary deferrals between 3 and 5 percent of compensation.

By requiring the employer to provide a minimum contribution to all employees, the owners and highly compensated employees can receive a higher profit sharing contribution. The owners benefit from greater tax deductions and retirement savings and can help retain their most valuable employees.

Advantages of a 401(k) Safe Harbor Profit Sharing Plan for Your Business

-Tax-deductible employer contributions
-Employees contribute for their own retirement
-Employer does not bear the entire retirement funding burden
-All employees can defer up to the maximum limits
-Tax-deferred retirement savings
-Employees typically direct salary deferral investments

Points to Consider About a Safe Harbor Profit Sharing Plan

-Must satisfy nondiscrimination testing, unless maintaining a safe harbor status.
-Employer contribution is required to maintain safe harbor status.
-Retirement benefits are impacted by investment returns.

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