Retirement Plans for self employed business owners and small closely held business owners looking for a way to provide a benefit for you and for those employees who are helping build a successful company. At Mid America Wealth Management we can assist you in determining the plan that is best for your particular situation. To schedule your initial consultation click here.
- Traditional 401(k)
- ROTH 401(k)
- Safe Harbor 401(k)
- Solo 401(k)
- 412(i) Plans
Why 401(k) Plans?
401(k) plans can be a powerful tool in promoting financial security in retirement. They are a valuable option for businesses considering a retirement plan, providing benefits to employees and their employers.
Employers start a 401(k) plan for a host of reasons:
- A well-designed 401(k) plan can help attract and keep talented employees.
- It allows participants to decide how much to contribute to their accounts.
- Employers are entitled to a tax deduction for contributions to employees’ accounts.
- A 401(k) plan benefits a mix of rank-and-file employees and owners/managers.
- The money contributed may grow through investments in stocks, bonds, mutual funds, money market funds, savings accounts, and other investment vehicles.
- Contributions and earnings generally are not taxed by the Federal Government or by most State governments until they are distributed.
- A 401(k) plan may allow participants to take their benefits with them when they leave the company, easing administrative responsibilities.
Safe Harbor 401(k) plans
Like traditional 401(k) plans, are a type of company-sponsored retirement plan allowing employees to save for retirement on a tax-favored basis. These plans permit employees to make pre-tax salary deferral contributions, and while they require the employer to fund a minimum contribution on behalf of participants, they offer a number of advantages over traditional 401(k) plans.
Features and Benefits
Over the last several years these plans have become very popular with employers because of the features and benefits listed below:
- Pre-Tax Salary Deferrals – Like traditional 401(k) plans, these plans allow employees to contribute pre-tax salary deferrals of up to $18,000.
- Catch-up Contributions – Employees over age 50 can make catch-up contributions of up to $5,500 per year.
- Employer Contributions – Safe Harbor 401(k) plans require the employer to make fully vested minimum
- contributions as described in detail below. Employers can elect to contribute additional matching and / or profit sharing contributions above the minimum required.
- Vesting Options – While designated Safe Harbor Contributions must be fully vested, any additional employer contributions can be made subject to a vesting schedule.
- Reduce Complexity – Safe Harbor Plans reduce complexity because they are automatically deemed to pass the ADP and ACP Non-discrimination Tests required by traditional 401(k) Plans.
- Maximize Contributions – These plans allow Highly Compensated Employees to contribute the maximum salary deferral without concern about refunds caused by the ADP and ACP tests resulting from low employee participation.
- Flexible Design – Safe Harbor 401(k) plans can be offered with the same flexible features as traditional plans, including eligibility, loans, and distribution options. They can also be designed to give employers flexibility each year in deciding the plan’s status as a safe harbor plan.
Who Should Implement?
Any business seeking to establish a company-sponsored retirement plan for employees should consider the benefits of Safe Harbor 401(k) plans. Companies with the characteristics below are ideal candidates.
- Companies Wishing to Maximize Contributions – Unlike traditional 401(k) plans, Safe Harbor 401(k) plans are generally not subject to the ADP Test and ACP Test. This allows highly compensated employees to avoid corrective distributions and to defer the maximum contribution, regardless of participation from non-highly compensated employees. When paired with a New Comparability profit sharing feature, these plans can allow HCEs to receive the maximum contribution permitted in a defined contribution plan.
- Companies Willing to Fund Contributions – Because contributions are required, it is important that an employer be willing and able to fund annual contributions on employee’s behalf.
- Companies with Top Heavy Plans – Because safe harbor plans can automatically satisfy Top Heavy Requirements, any company with a top heavy plan requiring top heavy minimum contributions may wish to adopt a Safe Harbor 401(k) Plan.
- Companies Wishing to Offer Strong Employee Benefit – Because Safe Harbor Plans offer guaranteed employer contributions that are fully vested, these plans are very attractive to employees and are sure to help with employee recruitment and retention.
- Companies Seeking Tax Savings – Safe Harbor 401(k) plans offer tremendous tax savings to both employers and employees. Employers receive tax deductions for making contributions, and employee salary deferrals are made before federal income taxes are withheld. All contributions grow on a tax-deferred basis.
Required Employer Contributions
As previously mentioned, the employer contributions are not discretionary. Employers are required to make fully-vested safe harbor contributions on behalf of employees. The required contribution can be structured several ways as discussed below:
- Matching Options – Employers choosing the matching option fund employer contributions only to those participants that elect to contribute on their own behalf. This is called a matching contribution, and it must generally be equal to 100% of employee contributions up to 3% of salary and 50% of employee contributions on the next 2% of salary. Alternatively, the matching contribution can be equal to 100% of employee contributions up to 4% of salary.
- Non-Elective Option – Employers can also choose to fund the required contribution as 3% non-elective contribution. The non-elective contribution is similar to profit sharing in that it is funded to all eligible participants, including those that do not make salary deferrals.
Below are some important requirements for companies considering Safe Harbor 401(k) Plans.
- Employee Notice Requirement – The IRS requires employers to give a Safe Harbor Notice to each eligible participant 30 days prior to the beginning of the plan year in which safe harbor contributions will be given.
- Maybe Notice – Plans that are designed to give employers flexibility in deciding their safe harbor status on an annual basis are referred to as “Maybe” or “Wait and See” plans, and require employers to give an annual “Maybe Notice” to participants. This type of plan design requires the employer to fund the safe harbor contribution as a non-elective contribution, not as a safe harbor matching contribution.
- Deadline for Establishing a New Plan – Safe Harbor 401(k) Plans are required to have a minimum plan year of at least 3 months. This means new plans with a calendar year end must be established before October 1st to be effective for that plan year.
- Conversion of Existing Plans – Employers currently sponsoring 401(k) or profit sharing plans can generally convert their existing plans to Safe Harbor 401(k) Plans. Profit sharing plans can be converted at any time (except for the 3 month rule mentioned above). However, the conversion of 401(k) plans is not effective until the following plan year for which the required 30 day notice is given.
- No Service or Hours Requirement Allowed – Safe Harbor 401(k) Plans cannot impose an employment condition or hours requirement on the receipt of safe harbor contributions. This means that employees receive the contribution even if they terminate employment during the plan year.
- Safe Harbor Contributions are Fully Vested – All safe harbor contributions are 100% vested. Any non-safe harbor contributions made to a Safe Harbor Plan can be made subject to vesting.