Planning for your future is critical. Discover how a safe harbor 401(k) could help set you and your employees up for long-term success.
A safe harbor 401(k) is a great way for small business owners to reward employees and keep them happy by making generous retirement contributions on their behalf that are immediately vested. And business owners know that finding and keeping good employees is one of the keys to increasing profits.
Immediate vesting means an employee doesn’t have to wait a few years in order to receive 100% of the employer contributions.
It also means that the employer avoids costly plan testing and may allow for much higher contributions for both the owner and highly compensated employees.
Nondiscrimination testing is one of the largest disadvantages for company owners running a traditional 401(k) plan. It makes the plan more expensive to operate and may reduce the allowable contributions that can be made by the owner and highly compensated employees.
This required testing is meant to ensure that all employees, regardless of salary or level of income, are treated equally by the plan.
Under testing rules, if non-highly compensated employees aren’t putting enough into the plan, then the amount owners and higher-paid employees can contribute will be limited.
A safe harbor 401(k) allows employers to avoid the nondiscrimination testing as long as they make a contribution on behalf of their employees.
A Safe Harbor 401(k) Requires Employer Contributions
In order to be considered a safe harbor 401(k), the employer must make at least one of two types of contributions on behalf of employees:
- Contribute 3% of every employee’s salary, regardless of whether they also contribute.
- Provide a 100% match of the first 3% of employees’ contributions and 50% of the next 2% of their contributions.
As long as this safe harbor minimum contribution is satisfied, the employer can then defer the maximum $20,500, or $27,000 for those age 50 or older, into their own 401(k).
Newly established safe harbor 401(k)s can also take advantage of a tax credit created by the SECURE Act of 2019 that can be as high as $16,500 for starting a new qualified company plan.
The tax credit is equal to $250 for each non-highly compensated employee who is eligible to participate in the plan with a minimum credit of $500 and a maximum credit of $5,000 for three years.
Also, if a business adds an auto-enrollment feature to its plan, it can claim a tax credit of $500 per year for three years.
Safe Harbor 401(k) Could Be More Cost-Effective for a Small Business
While mandatory contributions to employee 401(k) accounts can be an expensive proposition for a large company, for a small business it may be more cost-effective to make retirement contributions on behalf of employees rather than deal with the more expensive and burdensome nondiscrimination testing.
Remember the most important thing the employer may get out of making these employee contributions is keeping good employees happy.
And happy employees tend to stay.
This article was written by ChFC and Mike Piershale from Kiplinger and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to firstname.lastname@example.org.
This article is licensed content that was created by a third party not affiliated with Santander Bank, N.A. (“Santander”). This article is for promotional purposes only. Santander does not provide investment, business, financial, accounting, tax, or legal advice, and the content of this article does not constitute investment, business, financial, accounting, tax, or legal advice. Santander does not make any claims, promises, or guarantees about the accuracy, completeness, currency, or adequacy of any content. Santander expressly disclaims all express and implied warranties of accuracy, completeness, currency, or adequacy of the information and content in this article. Readers should consult their own attorneys or tax or other advisors regarding the applicability of any referenced information, or financial or other strategies to their own unique circumstances. This article does not necessarily reflect the views or endorsement of Santander. Please note that third-party websites may have privacy and security policies different from Santander; please review the privacy and security policies of such websites.
Santander Bank, N.A. is a Member FDIC and a wholly owned subsidiary of Banco Santander, S.A. ©2023 Santander Bank, N.A. All rights reserved. Santander, Santander Bank and the Flame Logo are trademarks of Banco Santander, S.A. or its subsidiaries in the United States or other countries. All other trademarks are the property of their respective owners.
Have a question about this article? Ready to realize the big potential for your small business? We can help.
To connect with a Santander Relationship Banker, schedule an appointment or visit a branch near you.