Safe Harbor 401(k) Plan for Phoenix Business Owners

The Safe Harbor 401(k) Plan is a great option for your small business. When it comes to setting up a retirement plan for your business, the options are endless. You should choose a plan that not only suits your business set up but also suits your retirement goals. Keep reading to learn more about the Safe Harbor 401(k) plan. 

Nondiscrimination Tests

With most 401(k) plans, businesses are subject to the annual nondiscrimination test. This test compares highly compensated employee or business owners’ 401(k) contributions against the remaining employees. As long as the average contributions of highly-compensated employees (compensation greater than $130,000 in 2020) don’t exceed the average contributions of everyone else by more than 2%, it is likely that you will not be subject to any of the repercussions of excess contributions. On the other hand, if you fail the nondiscrimination test, you may end up owing federal and state income tax and/or a 10% penalty fee on excess contributions.

Avoid Nondiscrimination Tests by  Adopting a Safe Harbor 401(k) Plan.

A Safe Harbor 401(k) Plan allows Phoenix small business owners and more to avoid nondiscrimination tests and provides flexibility in how you make contributions to your employees’ 401(k) plans. Employer contributions can be matching contributions limited to employees who are participating in elective deferrals, or contributions can be made on behalf of all eligible employees. The safe harbor provision can be added to any type of retirement plan; however, there are a few caveats you should consider before making any changes:

  1. You have to match funds consistently based on how your employer contributions are set up with your plan.
  2. Your employer contributions must fully vest when they are made.
  3. You are required to notify your plan participants of the safe harbor plan within 30-90 days before the beginning of each plan year.

Whether you have a retirement plan in place or you are interested in adding a safe harbor provision to your existing plan, there is still time for you to set up a Safe Harbor 401(k) Plan.

New Safe Harbor 401(k) Plans

For new Safe Harbor 401(k) Plans, the deadline is October 1 for calendar-based plans. If you do not plan to use a calendar year-end, the first year of a new plan must be in place for at least 3 months. 

To amend your current plan into a safe harbor plan, the deadline depends on the type of safe harbor contribution you choose:

For safe harbor match contributions, the deadline is the last day of the year preceding the year the plan will be safe harbor.

For safe harbor nonelective contributions, the deadline is 30 days before the close of the plan year that the plan will be safe harbor. If the nonelective contribution is 4% or greater, the deadline is the last day of the plan year following the plan year that the plan will be a safe harbor.

Regardless of your situation, if a Safe Harbor 401(k) plan piques your interest, it is best to contact your retirement plan administrator as soon as possible to discuss your options.

If you are a Phoenix-based business looking to innovate in your business, look no further! Contact us with any questions you have. We are happy to help!

Source 1, Source 2, Source 3

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Marissa Ha
Marissa Ha, CPA is an on-call tax consultant at MOD Ventures. Her knowledge of all things tax and business ownership makes her a wonderful addition to our team.