The IRS deadline to establish a new 2022 Safe Harbor 401k plan is October 1—meaning there is still time for small business owners to establish a new plan and take advantage of maximum contribution limits.
Many small businesses prefer the simplicity of the Safe Harbor 401k plan design versus a traditional 401k due to a variety of benefits and savings for business owners seeking to lower taxes, save for retirement, and help attract and retain top talent.
Of course, the key benefit of the Safe Harbor 401k is that it automatically satisfies IRS non-discrimination testing requirements and enables the option for any employee, including highly compensated employees, to maximize their 401k contributions up to the maximum 2022 limits of $20,500 (or $27,000 if the employee is 50 or older).
Considering all 401k plans (except Solo 401ks) are subject to government tests, the Safe Harbor plan can make 401k management easier and more efficient.
“401k plans are a lot less expensive than many businesses think—for example, a plan of 10 employees will pay less than $100 per month,” says Stuart Robertson, CEO of Seattle-based ShareBuilder 401k. “Any business with fewer than 100 employees that opens their first 401k plan can receive a tax credit that is designed to cover half of these costs—up to $15,000 for the first three years.”
While the federal deadline to start a Safe Harbor 401k plan is October 1, Robertson said businesses actually need to enroll by Sept. 27, as it typically takes a few days to set up the plan and ensure the October 1 deadline is met. Businesses that miss the Safe Harbor 401k deadline but still start a new plan will face additional monitoring, testing, and potential limitations on how much owners and other high earners can contribute annually.
Starting today, Sharebuilder 401k is offering incentives for businesses who sign up for its Safe Harbor or Traditional 401k plans—to the tune of 50% off set up costs between Aug. 19-Sept. 12, or 25% off plans set up between Sept. 13-25.
“We know rising costs are putting pressure on company’s profit margins, so we want to help show them ways to keep expenses down while still staying competitive for top talent,” Robertson said.
Adding Safe Harbor to existing plans
Those interested in adding a Safe Harbor match provision to a current plan can include a plan amendment that goes into effect January 1 so long as employees receive notice at least 30 days prior.
As a recent post from Betterment at Work points out, existing plans that want to become a nonelective Safe Harbor plan—meaning the employer contributes regardless of whether the employee does—have newfound flexibility thanks to the SECURE Act.
An existing plan can implement a 3% nonelective Safe Harbor provision for the current plan year if amended 30 days before the close of the plan year. Plans that decide to implement a nonelective Safe Harbor contribution of 4% or more have until the end of the following year in which the plan will become a Safe Harbor.
The SECURE Act also allows plan sponsors with an automatic enrollment safe harbor plan to increase the auto-escalation cap up to 15%.
SEE ALSO:
• Just 1 in 4 Small Businesses Currently Offer a 401k
• SIMPLE IRA or 401k? 4 Key Differences to Share with Small Business Clients