What is the difference between plain and safeharbor 401k plans?

Posted on 21 February 2011 by admin

Safeharbor 401k plan

Safeharbor 401k plan

The main problem of applying 401k pension program is discrimination testing. Due to it highly compensated employees are not allowed to increase their annual contribution limits, as the maximum limit is equal for all highly compensated employees and non-highly compensated employees (HCEs and NHCEs). The solution is safeharbor 401k plan.

According to the plain 401k plans, contributions of HCEs should be proportional to the contributions of NHCEs, and safe harbour plan implies that HCEs can increase their annual contributions even if NHCEs don’t. The advantage is that applying for safe harbour 401k program, employers do not need to spend time and money for discrimination testing that other 401k programs imply. According to this plan, all employees are allowed to contribute maximum of their earnings. While employees are not limited in their savings and employers are provided with more beneficial conditions, safeharbor 401k plan stimulate the interest of both parties to applying for 401k pension programs.

One more advantage for employers is that safe harbour plan usually attracts highly qualified, professional employees. In case of offering matching funds, employers have direct benefits in financial sense. All this makes safeharbor 401k pension plan the one that most of employers would like to establish and offer their employees. Currently, when the funds for Social Security are reduced, a lot of professional employees don’t believe that the government is ready to provide them with fairly compensated retirement. The most of employees are looking for an opportunity to secure their own retirement age by them. Safe harbour 401k is exactly the right form of securing yourself beyond retirement. Moreover, it provides healthy conditions for all types of employees. Very often the availability of safe harbour 401k pension plan can be an important factor when choosing between a few working places.

The approach used in this plan is the cheapest way to save money for the retirement, as the contributions are made from pre-tax income. If there is an employer who offers match contributions, an employee can double the retirement contributions without any costs from his own side. A company just meets the contributions of an employee and doubles them by its own contributions. The funds on safeharbor 401k account are not taxed until they are withdrawn, that is essentially important now, when taxes can ‘eat’ the account in the long term.

An employee who decided to apply for a safe harbour 401k plan should satisfy two simple requirements. The first one is the age of 21 years or older. And the second one implies that an employee should work in the company for at least one year with one thousand of working hours (as minimum). These simple requirements are enough to get the ability to save for pensions reliably and beneficially. Of course, if the company offers this plan to its employees. The exclusion is non-residents of USA without US source of income.



2 Comments For This Post

  1. Tom Sd75 Says:

    safeharbor 401k plan seems to be a very good thing, but unfortunately my employer doesn’t offer it to us. try if you are given a chance.

  2. Marta P Says:

    Safeharbor 401k plan is rather advantageous thing both for an employer and for an employee. It may be a good decision to make about life after retirement.

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