Safe Harbor 401(k) Plans Provide Smooth Sailing – Rea CPA

Safe Harbor 401(k) Plans Provide Smooth Sailing

Does your company have a 401(k) plan that always fails the required testing? As an owner do you always receive excess contributions? Did you know that a safe harbor plan eliminates the need for nondiscrimination testing?

The basic principle of a safe harbor 401(k) plan is that a certain minimum contribution is provided by the employer in exchange for being able to eliminate deferral (ADP) and matching (ACP) nondiscrimination testing. The benefit of eliminating the testing is that highly compensated employees (HCEs)—generally employees who are more than 5 percent owners and those whose earnings are over a specified threshold in the prior year—can defer up to the annual limit without concern for what the Non-Highly Compensated Employees defer.

Under the normal 401(k) plan rules, the average deferral percentage allowed for the HCEs is slightly higher than the average percentage deferred by the Non-Highly Compensated Employees.

Contact us for further information on Safe Harbor 401(k) Plans. Let Rea & Associates provide smooth sailing for your retirement plan!

This article was originally published in Illuminations: Facts & Figures from people with a brighter way, a Rea & Associates enewsletter, 8/31/2005.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.