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Why You Should Have a Safe Harbor 401k Plan for Your Employees

Why You Should Have a Safe Harbor 401k Plan for Your Employees

Why You Should Have a Safe Harbor 401k Plan for Your Employees

When running a business, there are tons of things that need to be considered in order to keep employees happy and working in your company for a long time.

One such consideration deals with 401k plans and retirement planning in general. Employees love having a great retirement plan through their employers. It gives them peace of mind that their future is more secure and protected.

Unfortunately, there are some factors that complicate the issue when businesses attempt to start a 401k plan. Some of the most important considerations deal with the issue of IRS non-discrimination testing.

Thankfully, a Safe Harbor 401k plan enables businesses to easily bypass these IRS tests and keep their company running smoothly.

Important Changes to Safe Harbor 401k Plans in 2022

The IRS announced recently that they will be raising the contribution limit for 401k plans by a total of $1,000. Now, the total contribution limit for employee 401k plans is $61,000 for those under the age of 50, and $67,500 for those over the age of 50.

But the amount that can be contributed to individual plans isn’t the only important consideration. In fact, companies need to be aware of some important terms that apply to higher-wage earners within a company.

HCEs or Highly Compensated Employees, are considered to be those workers who have earned more than $135,000 in 2021. Alternatively, HCEs can include those who own more than 5% of the company.

“Key employees” is another important term related to safe harbor plans. These individuals expect to earn more than $200,000 in 2022. Key employees cannot own more than 60% of the total balance in the plan. Otherwise, the plan will be deemed top-heavy, and the company will fail one of the three IRS compliance tests.

Three IRS Nondiscrimination Tests

The three tests which are imposed by the IRS each year on all businesses’ 401k plans are the Top-Heavy Test, the Actual Deferral Percentage Test, and the Actual Contribution Percentage Test. Each of these tests places a limit on the amount of money a highly paid employee can contribute to their plan, and how much these contributions are matched by employers.

Failing any or all of these tests is a nightmare for businesses. They generally have to pay hefty fines and complete time-consuming paperwork in order to get through the ordeal. For this reason, it’s always best to utilize a Safe Harbor plan to ensure that 401k plans automatically bypass the IRS tests.

Important Dates for 2022

If you are interested in setting up a Safe Harbor 401k plan for your company in 2022, you should not waste any time. The deadline for starting a Safe Harbor plan utilizing matching contributions this year is October 1st 2022. Further, the deadline for starting a Safe Harbor plan utilizing nonelective contributions this year is December 2nd 2022.

If you have questions or are interested in starting a Safe Harbor plan for your business, contact a plan provider right away!

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