While in the third form, a company has to contribute even if the employees do not defer their income. The first two forms are called matching – here, the employees must defer their funds to receive contributions. In the traditional safe harbor 401(k) plan, the employer has to make contributions and vest them immediately. Individuals above 50 can contribute an additional $6,500 in catch-up contributions. With a safe harbor 401(k) plan, everyone can contribute upto $20,500 in 2022. Moreover, the ADP test cannot cap out the highly compensated employers.Īpart from the owners, even the employees can benefit. But the ones that follow the safe harbor structure already ensure they comply with the governmental requirements. How does a safe harbor 401(k) work?Ĭompanies with the regular 401(k) plan must pass the nondiscrimination test every year. In exchange for this, the IRS offers employers a safe harbor, a pass from any nondiscrimination tests, and they do not have to face any failure consequences. It intends to provide all 401(k) account holders with an employer contribution. What is a safe harbor 401(k) plan?Ī safe harbor plan is a part of the 401(k) plan designed to satisfy the nondiscrimination tests. This is where a safe harbor 401(k) can help! With a safe harbor, you are secured against the uncertainties of these annual tests. If there are any failures in these tests, you will have to face the consequences. Top-Heavy Test: It measures the key employees’ asset values in their 401(k) accounts compared to the assets held in their 401(k) plan.
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