The safe harbor deadline for 2016 is October 1st so time is of the essence
If you or your clients have been thinking it’s time to add a 401(k) Plan for yourself & your employees, the time is now. As you’re likely aware, the IRS offers a “Safe Harbor” feature that means if you are willing to provide a modest benefit to your employees, you can invest & defer taxes on $18,000 of income ($24,000 if age 50 or above) and likely make an additional profit-sharing contribution for owners or other targeted staff.
What’s a Safe Harbor 401(k) Plan?
There are really two (2) versions of the Safe Harbor 401(k) Plan:
- Nonelective Contributions – the employer will contribute 3.0% of pay for all eligible employees regardless of whether or not they contribute their own funds to the Plan; or
- Matching Contributions – the employer will match 100% of the 1st 3.0% of pay deferred by an eligible employee and 50% of the next 2.0% of pay deferred by the employee. The maximum potential cost to the employer is 4.0% of pay.
401(k) Plans, nondiscrimination tests & how much you can defer?
The IRS has various nondiscrimination tests that a 401(k) or other qualified plan must pass in order for highly compensated employees (“HCE’s”) – aka business owners or those making over $120k per year – to defer income and taxation on such funds. These tests effectively limit the ability of HCE’s to defer income unless their employees also defer a portion of their income (the % deferral rate for HCE’s may not be more than the lesser of 2 times the rate of the employees or 2.0% more than their rate). As such, if your employees do not significantly safe for retirement, the business owner will see their retirement savings and tax deferral severely limited.
Why would I want a Safe Harbor Plan and have to contribute for my employees?
A valid question. However, the IRS will waive the nondiscrimination tests noted above if you make one of those Safe Harbor contributions. As such, if the employer is willing to provide a modest benefit to the employees (deductible to the company as an employee benefit expense), the owner & key staff will be able to maximize their retirement savings while reducing their taxes. For small & closely held employers, this can be extremely valuable at a modest cost. Beyond that, you may also be able to make a profit sharing contribution for the owner (again, deductible to the company as an employee benefit expense) of potentially up to $23,850 beyond his/her own individual tax deferral without any extra contributions for your employees.
Why am I getting this email now?
If a business owner would like to utilize this type of plan for 2016, you are facing a deadline of October 1st to have the plan up & running & ready to accept salary deferrals. So, there is still time, but the proverbial clock is ticking.
What should I do?
If you or your clients are looking to reduce their 2016 bill, now is the time to act whether you choose Odyssey or another provider. We encourage you to chat with your accountant or tax advisor to see if having a complimentary study done to determine the cost/benefits of such a plan makes sense for you.
Congress and the IRS often make life difficult for the business owner to save for retirement & accumulate assets. This is a great way to begin taking care of yourself while also providing a valuable benefit to your employees.
As always, if you have questions on this or need more, please contact your Odyssey consultant.