Sailing into a safe harbor 401(k)

Published on: Aug 7, 2013

Maybe you want to start a 401(k) plan but you don’t want to put up with the requisite annual discrimination testing. Or maybe you have a few highly compensated individuals who want to contribute more to their retirement than what might be permitted if the discrimination test fails.

What to do? Consider what is commonly referred to as a “Safe Harbor 401(k).” The IRS automatically deems these plans non-discriminatory and does not require the annual test.

 “Safe harbor 401(k)s are very popular,” says Tracy Davidson, president of Davidson Pension Consulting, Corte Madera, CA (www.davidsonpension.com). “These are attractive to business owners because highly compensated individuals can put away more pre-tax money.” 

Safe harbor 401(k)s are especially popular among smaller employers with highly compensated owners or managers. In such firms employees often want to contribute only a small percentage of their salaries. But owners can put in much more, unlike a plan which is not a safe harbor plan.

Employers can make profit sharing contributions up to a maximum (including the deferrals and match) of $51,000 for the tax year 2013.

Here’s the catch: You enjoy your safe harbor by agreeing to a new requirement. You must either match each participating employee’s contribution (up to four percent of the employee’s compensation), or you must make an across the board non-elective contribution equal to three percent of each eligible employee’s compensation.