Safe Harbor 401 k Plan
In the United States 401k is a special category of retirement savings account. This has its origin in the Internal Revenue Code’s (IRC) subsection 401 k. It began in 1980s and was the first broadly accepted retirement policy for the workers in the US. A safe harbor 401k plan is a distinct category of 401k plan that promotes participation of the workers. The employers also find this policy more affable and easy to implement. With the aid of this, the eligible workers are allowed to contribute a part of their monthly income to a defined retirement plan. Under this, the employers also contribute matching amount on behalf of the employees. The contributions made by the employers are tax deductible and on the other hand, the contributions made by the workers excluded from taxes.
Major Requirements of 401k Safe Harbor Plan
There are few basic requirements for this policy. These requirements are listed below.
- Each year, report should be sent to all the participants which should comprehensively explain the all the details and the updates related to the policy
- The minimum contribution made by the employer is 3%, irrespective of the contribution of the employees.
- Withdrawal restrictions are there.
- Any contributions made are immediately 100% vested.
Eligibility to Establish or Avail this Plan
Below here we provide the eligibility criteria required by the employers to establish this as well as the eligibility criteria required by the workers to avail this. The eligibility criteria are listed below.
To avail this, a worker should be
- Minimum 21 years of age
- Should have completed service of at least one year and should have worked at least 1000 hours.
- Generally, the non-resident aliens and the union employees who have no US source of income are excluded from this plan.
- Partnerships, sole proprietorships and limited liability corporations (LLCs) can set up this scheme.
Safe Harbor 401k Plan Advantages
There are some distinct advantages of the safe harbor 401k plan. The advantages are listed below.
- Contributions made by the employers are tax deductible. Up to 25% can be deducted as tax.
- At the time of calculating the income of the employees for Federal Income Tax purposes, employee elective deferrals are excluded.
- There are chances for tax-deferred potential.
Apart from the above mentioned tax advantages, there are other advantages, which are listed below.
- This does not require extensive discrimination testing. It is worthy to mention that some market risks are associated with any investment in the equities, including the mutual funds. There are also chances of possible loss of the principal amount.
- This is very much attractive and has all the potential to retain employees.
- These are very helpful to assist eligible workers to receive retirement income.
- There is automatic enrollment system in the scheme. This automated system enables the new employees to be soon placed under the scheme.
- The automatic contribution system makes it comparatively easy for the employers to save more for retirement.
- According to the scheme, some designated contributions are allowed.
- In this plan there are more restrictions on the employers’ side. However, if it is implemented properly and accurately, it can be very much cost effective both in the short run as well as in the long run.
Limits of 401k Contributions
This is indeed an excellent retirement-savings scheme, provided by the employers. This allows the workers to invest a part of their monthly salary in some designated plans. These come really handy in the retirement days. During the future years, the employees can continuously receive certain amount of money to their advantages. However, the contributions made by the employees are limited.
The upper limit of the contribution made by an employee is determined by the US federal law. This limit increases with the rise in inflation rate. According the rule, the upper limit to annual contribution to traditional scheme was around $15,500.
This facility is meant for the workers who are above fifty years of age. As these senior citizens approach retirement, they are allowed to add extra money to erect their accounts. This is akin to ‘catch up’ contributions. Generally, the employees who have crossed the age of 50 could annually contribute an additional $5500 in catch-up money.
The individual workers may opt for lower annual contributions than determined by the federal law. In these cases, these annual limits take precedence over the maximum limits set by the federal government.
The maximum contribution limit set by the federal government is also applicable for multiple accounts. If an individual is engaged in two occupations and each of them offers a 401k, then the total amount of contributions in the two accounts should not be more than the maximum limit set by the federal government.
The maximum limit applies to the contributions made by the employees only. No such limit is applicable for the matching contribution made by the employers. The employers make the matching contribution up to a certain point. The employers make contributions matching employees’ contributions dollar for dollar up to 5% of the salary of the employee.
In case of early withdrawal, a penalty is imposed on the employees. In case the participants are aged below 59.5 years, a tax penalty of 10% is applied to the participants. Reporting should be made to the IRS every year. Applicable schedules and form 5500 must be filled each year by the employees. Each of the beneficiaries is entitled to receive an easily comprehensible summary of the plan description within three months after becoming eligible to avail the scheme. Annual report should be sent to the beneficiary within seven months after the end of each plan year.
Disadvantages of Safe Harbor 401k Plan
This involves contributions made by the employers also. Since it involves contributions made by the employers, the employers sometimes feel these are less flexible than the traditional schemes. Another major disadvantage of it is that the contributions made by the employers are vested 100%. Another thing is that the annual notice has to be sent to all the participants of the scheme.