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:
- 3% of compensation to ALL eligible employees OR
- A matching contribution calculated as:
- 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
- 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 email@example.com. Remember, the plan needs to be set up by October 1, 2020 in order to take advantage of these benefits in 2020.