A safe harbor 401(k) is a popular plan for small employers. It allows an employer to maximize contributions for highly-compensated employees and satisfy non-discrimination (and possibly top-heavy) requirements by making a minimum contribution to all eligible and/or participating employees. By providing a more generous employer contribution and vesting schedule, non-highly compensated employees also benefit by having a greater opportunity to save for retirement.
There are several formulas and methods available for a safe harbor plan. The best solution will vary from employer to employer. An advisor can review a variety of scenarios, along with any restrictions, to determine the best strategy for each company. While there are other options available, a safe harbor plan may provide the easiest option to administer on an ongoing basis and may not be as costly you think.
A company may be a good candidate if they 1) routinely fail annual ADP and ACP discrimination testing, 2) have low participation or 3) are top-heavy. Under this arrangement, the need for annual ADP and ACP tests is eliminated and the need for top-heavy testing may also be eliminated based on plan design.
If a company wishes to change an existing 401(k) to a safe harbor for 2009, the deadline is December 1, 2008. It is important to begin the process as early as possible, as there are minimum notice requirements for employees and all documents must be updated accordingly.
If you would like additional information on this or any other general retirement topic, please do not hesitate to contact Steve Lamm, Hicks Pension Services.
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