Safe Harbor 401k Plans

The Safe Harbor 401k Plans allow employers to offer a retirement plan for their employees without having to run into the problem that come with discrimination testing.

Most 401k plans need to have an annual nondiscrimination test to make sure that highly compensated employees are not receiving more benefits then non highly compensated employees.

Some employers may want to help their top workers in the companies save more money and by doing so give them some more benefits then the workers who are on the bottom of the totem pole. That would cause a bias towards upper-class workers when it comes to saving for retirement. As a result, it would give top workers more benefits with their 401k is illegal.

Any company which gives out a 401k plan must run their plan through a variety of tests on a regular basic to make sure that it is not favoring its top employees with the plan. If the company does not meet these tests then they are required to refund money.

As you can imagine taking the time to make sure you are not favoring one employee over another will be a lot of work. This can make setting up and maintaining a regular 401k hard and confusing especially for small businesses owners.

However there is one way which you can create a 401k plan for all your workers and not have to worry about testing it to make sure you are not favoring one worker over another.

The answer is a safe harbor act which forces the employer to contribute 3% of compensation to all eligible employees who worked for them during the last year. All of the contributions must be 100% vested.

Vested

Vested means that the owner of the 401k receives ownership of their retirement account or benefits. All contributions to a 401k must be 100% vested in order to create Safe Harbor 401k Plans.

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