Set up a New Safe Harbor 401(k) Plan by October 1

Business owners and other Highly Compensated Employees (HCE’s) really benefit from a Safe Harbor 401(k) Plan. They can maximize their deferral contributions to the plan regardless of the level of participation by the Non-HCE’s. That maximum for 2020 is $19,500 plus a $6,500 catch up contribution if age 50 of older. The cost of this benefit is an employer contribution to the employees (HCE’s and Non-HCE’s). This Safe Harbor employer contribution can be done in one of two ways:

  1. 3% of compensation to ALL eligible employees OR
  2. A matching contribution calculated as:
    1. Matching contribution of 100% of the first 3% of an employee’s contribution, and 50% of the next 2% of an employee’s contribution. Thus, if an employee contributes the full 5%, it will cost the employer 4% OR
    2. Matching contribution of 100% of the first 4% of an employee’s contribution.

If option 1) is used, this 3% safe harbor contribution can be used toward satisfying other discrimination tests within the plan, allowing for even more benefit for owners and HCE’s through a profit sharing contribution as well.

Tax Benefits: All Employer contributions to the plan are deductible on the company return, thus lowering tax liability. In addition, an employer adopting a new 401(k) plan may qualify for an additional tax credit of up to $500 per year for the first three years.

If you are interested, have questions, or would like a free proposal, please contact Anne Christian, CPA at achristian@bwtpcpa.com. Remember, the plan needs to be set up by October 1, 2020 in order to take advantage of these benefits in 2020.

Anne Christian, CPA is Manager of the Retirement Services department at BWTP, P.C. Read more about Anne here.

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