Safe Harbor 401K
What Is A Safe Harbor 401K
The Safe Harbor provision for a 401k is a provision that when adopted allows for the elimination of certain annual tests, this results in a plan that allows highly compensated employees to contribute the maximum amount from their own pay regardless of the participation rate of the non-highly compensated employees.
In order to qualify for the Safe Harbor provision, the employer has to provide a match of at least 100% of the first 3% of salary deferred plus 50% of the next 2% of salary deferred. In essence, any employee that contributes 5% of their salary or more would receive a 4% of salary employer match. This was implemented by the IRS to help ensure that companies extend their 401k plans to low-paid employees. The IRS rule limits the maximum deferral by the company's “highly compensated” employees, based on the average deferral by the company's non-highly compensated employee. This provision is enforced via “non-discrimination testing”. Non-discrimination testing takes the deferral rates of “highly compensated employees” and compares them to non-highly compensated employees.
It's all fancy terminology that basically is saying that those top paying executives making more than 100k are not being compensated more so in their 401k than an employee making less than 100k. The IRS was thinking of those workers don't receive a larger sum added to their 401k contribution by their company. This helps employees who make less than 401k have an equal chance of having a good retirement amount in their 401k when they do retire. |