Has your company informed you that shortly your retirement plan will be changed to a safe harbor 401(k)? If so, you might find a nice surprise. Safe harbor plans can contain employer contributions or matching programs designed to aid your retirement savings in some rather useful ways. Though every plan is unique, this shift could mean that, with the same annual contributions, you start to build even more vested funds in your 401(k) account. Learning the distinctions between a safe harbor plan and a normal 401(k) plan will help you to better grasp how a safe harbor 401(k) could affect the way you are already investing for retirement.
On corporate-run 401(k) systems, government agencies do periodic non-discrimination tests to make sure the advantages of the programs don't start to favor helping some employees more than others. The tests juxtaposition the voluntary donations made by highly paid employees with those made by other employees. Various criteria define who qualifies as a highly compensated employee. It may be someone with yearly income of $130,000 or more or an employee with more than 5% stake in the company. When no employees satisfy the conventional criteria, some businesses might choose to establish their own criteria for highly rewarded personnel. The company runs the danger of passing a non-discrimination test if too high percentage of annual contributions come from highly paid personnel. Should the company fail a test, it has to act in corrections, possibly including donations on behalf of lower-earning staff members. The disintegration of the 401(k) plan, so rendering the IRS no longer recognizing the savings as being tax-deferred, is the most grave result of repeated failed tests. Turning the program into a safe harbor plan is another option. A safe harbor strategy shields the company from costly risks associated with high-earning workers making most of their voluntary contributions.
Safe harbor plans, which are especially developed to satisfy non-discrimination testing criteria, do not undergo annual testing since they are not intended for that. The company makes designated annual contributions on behalf of every employee, not hoping that staff members from all income levels contribute enough. Since these contributions are vested as soon as they are made, the money belongs to the staff members, who can take it in line with 401(k) withdrawal policies. Employees still have free will to contribute personally to their 401(k). Every current 401(k plan can be turned into a safe harbor 401(k) plan. Changing things calls for two steps. The employer first needs to sort out the technicalities of converting the plan by consulting the provider of the 401(k). While most providers have safe harbor plan choices, others do not. Generally speaking, providers charge less for implementing a safe harbor plan than for a conventional one. Employers also have to provide written notification to staff members within 30 to 90 days following the change according to the IRS. The announcement ought to be very explicit about how the change will affect every worker and what employer contributions the employee might be qualified for.
Safe harbor 401(k) plans come in three flavors. Every kind of plan calls for an other kind of employer contribution. Under a non-elective safe harbor scheme, companies fund each employee's 401(k) with 3% of their yearly pay. Every employee qualified for a 401(k) makes this contribution; the company makes the same contribution independent of the amount the employee contributes. An employer-matched plan is a basic safe harbor 401(k). The employer will match employees who pay 3% or less of their yearly salary; the match won't be more than 3% of the employee's annual salary. Should the employee's contributions surpass 3% of their salary, the company will keep matching half of the earnings beyond 3%; nevertheless, the total contribution made by the employee for the year will not be more than 5% of their yearly salary. Another name for this kind of schedule is an elective safe harbor plan. An even simpler approach of employer contribution matching is an upgraded safe harbor 401(k). The company matches any money the employee gives one-for- one, but the employer contribution won't be more than 4% of the employee's annual salary.
Many staff members find great benefits from safe harbor policies. While some plan designs call for voluntary contributions to unlock the advantages of employee matching, one type of 401(k lets employees double any contributions made. Usually, even the best of investments do not double every time someone invests in them. One also gains much from immediate vesting. Under other 401(k plans, workers must wait three years or more for any 401(k) contributions to be completely vested, or essentially theirs to utilize. Although tax penalties for early withdrawals in retirement plans still exist, under a safe harbor plan an employee could withdraw all of the employer contributions anytime they wish.
