Starting a traditional 401k plan is often associated with expensive non-discrimination tests and IRS filing requirements that are complicated and taking a long time to complete. To avoid those hassles, small business owners try to look for another option of 401k plan. Many of them consider safe harbor plan the most suitable option for their small business retirement plan.
Employers who are establishing the safe harbor 401k plan have two options for making contributions to their employees’ accounts. The first option is called matching contribution. Under this method, employers have to match 100% of employees’ salary deferral up to 3% of the compensation. Employees with no deferral would not receive any match.
The second option is non-elective contribution. At this point, the owner of the business contributes 3% of salary to all eligible employees although they do not decide to make a deferral contribution. Both of these options require the contributions to be fully vested. It can be concluded that safe harbor 401k plans have more advantages than SIMPLE 401k plans and traditional 401k plans.
However, by the end of the first plan year, most of small business 401k plans are not in a balanced condition, especially if many of employees are family members. In fact, all 401(k) plans are considered top-heavy when more than 60% of the plan assets are in the accounts of the key employees.
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