As it is with many retirement benefit schemes around the world the Safe Harbor 401k rules are put in place to ensure that you are likely to be inclined to a 401k that will enable you to elude indiscriminate testing by furnishing you with the lowest levels of employers contribution. A safe harbour 401k scheme removes the yearly ADP and ACP tests that bar highly remunerated workers from contributing a higher amount as compared to lower paid workers. Therefore, you and your highly remunerated workers can fully exploit the salary deferral limit no matter what your other workers opt to engage in.  You can rest assured about the taxable refunds at the close of the year.

The safe Harbor 401k schemes were given endorsement by the small business job protection act of the year 1996 for plan years commencing in 1999. The beauty with these plans is that they are not the preserve of certain enterprises; any company can institute a safe harbour 401k scheme irrespective of the company’s size or if the company has or does not have an alternative type of scheme. All in all there are two alternatives for Required Employees Contribution: there is what we call matching, in which the employer contributes a dollar for a dollar match on the first 3% of pay the workers defer in addition to 50cts per dollar on the following 2% pay deferred.

Safe harbor 401k retirement scheme

There is also what we call Nonelective where an employer contributes 3% of their pay for all their qualified workers regardless of if they contribute by themselves or if they don’t. As an employer, before each scheme year comes to a close, you are obliged to provide your workers with a notification that clearly shows your choice. You also have the opportunity of swapping between alternatives as the years run by as long as the workers’ notification is provided as demanded and the scheme document is corrected. The nonelective alternative also gives you the option of declaring that you intend to, even though you have not fully committed yourself to, making this type of company contribution and that you will inform them if you decide to do so.

It is quite clear that the Safe Harbor 401k rules give employers approximately 12 months after the lapse of the scheme year to make the necessary employer contribution. Nevertheless, to qualify for a tax deduction, contributions ought to be made by the date the company’s tax returns, including extensions, are expected.

One advantage of this scheme is that you can you can always make corrections to your plans at the commencement of the year to remove Safe Harbor 401k plans necessary contributions for the coming year. You also have the right to halt future contributions in the course of the year if you opt out of the matching option as soon as you notify your employer as required. But you must match any amounts that had already been contributed.

In this instance you will not have Safe Harbor status and you will be required to meet ADP and ACP testing. Furthermore you cannot halt necessary contributions in the course of year if you go for the nonelective alternative. It is very interesting to note that Safe Harbor 401k contributions are 100% vested therefore the employer has the liberty of making additional contributions that add up to the legal limits.

The qualifications for the Safe Harbor and the traditional 401k are the same, therefore workers who are 21 years or older and have a minimum of one year service that adds up to 1000 hours must be permitted to join. Union employees may not be included. Either way, you may lay down less restrictive requirements as you desire.

You also have to make Save Harbor contributions for all your employees who are qualified to be part and parcel of the planning in the course of the year irrespective of the number of hours worked or whether they were employed on the final day of the plan year.

You are also bound by duty to provide your employees with a notification which details the plan and the employer’s contribution at least 30 days before and not more than 90 days prior to the new plan year but not after the date they qualify to participate. You must also remit additional notifications to the workers if you want to halt the matching contributions in the course of the year. With the Safe Harbor 401k rules, the matching option fulfils the top heavy rules therefore eliminating the necessity of additional contributions.