A popular type of 401(k) plan is what is referred to as a “safe harbor” 401(k) plan.  In a safe harbor plan, a plan can automatically satisfy required discrimination testing by making a required “safe harbor” contribution.  The required contribution can take one of two forms:

  1. A contribution equal to 3% of all eligible employees’ compensation. (For example, an eligible employee earning $50,000 would receive a $1,500 safe harbor contribution.)
  2. A matching contribution equal to 100% of the first 3% that an employee defers into the plan plus 50% of the next 2% that the employee defers. (For example, an employee earning $50,000 and deferring 5% into the plan would receive a $2,000 safe harbor match.)

IMPORTANT DEADLINE: A plan that intends to operate as a safe harbor plan must provide its employees with a required notice at least 30 days before the safe harbor provisions are effective.  Therefore, if a plan is going to operate as a safe harbor plan in 2013, the employees of that plan must receive the notice by November 30, 2012.

There are other rules that apply to safe harbor plans that must be considered before implementing this type of plan. If you have questions about your retirement plan or whether the safe harbor provisions might be appropriate for your plan, please contact Scott Mattingly, CPA, CFP, CRPS 410-307-2255

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