Safe Harbor 401(k)s in Small Business Can Help Keep Happy Employees Kiplinger Kiplinger is supported by its audience. When you purchase through links on our site, we may earn an affiliate commission. Here's why you can trust us.

Safe Harbor 401 k s Can Help Small-Business Owners Keep Happy Employees

Immediate vesting and contributions by the employer regardless of the employee's participation pump up workers. Employers get lower costs and tax benefits. (opens in new tab) (opens in new tab) (opens in new tab) Newsletter sign up Newsletter (Image credit: Getty Images) By Mike Piershale, ChFC published 8 November 2022 A safe harbor 401(k) is a great way for small-business owners to reward employees and keep them happy by making generous retirement contributions on their behalf that are immediately vested. And business owners know that finding and keeping good employees is one of the keys to increasing profits.

Save More for Retirement in 2023 Thanks to Higher IRA and 401(k) Contribution Limits Immediate vesting means an employee doesn't have to wait a few years in order to receive 100% of the employer contributions, so they can leave the company anytime if they want. It also means that the employer avoids costly plan testing and may allow for much higher contributions for both the owner and highly compensated employees.

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Profit and prosper with the best of Kiplinger's expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail. Profit and prosper with the best of Kiplinger's expert advice - straight to your e-mail. Sign up Nondiscrimination testing is one of the largest disadvantages for company owners running a traditional 401(k) plan. It makes the plan more expensive to operate and may reduce the allowable contributions that can be made by the owner and highly compensated employees. This required testing is meant to ensure that all employees, regardless of salary or level of income, are treated equally by the plan. Under testing rules (opens in new tab), if non-highly compensated employees aren't putting enough into the plan, then the amount owners and higher-paid employees can contribute will be limited.

401(k) Contribution Deadline Coming Soon A safe harbor 401(k) allows employers to avoid the nondiscrimination testing as long as they make a contribution on behalf of their employees.

A Safe Harbor 401 k Requires Employer Contributions

In order to be considered a safe harbor 401(k), the employer must make at least one of two types of contributions on behalf of employees:Contribute 3% of every employee's salary regardless of whether they also contribute. Provide a 100% match of the first 3% of employees' contributions and 50% of the next 2% of their contributions. As long as this safe harbor minimum contribution is satisfied, the employer can then defer the maximum $20,500, or $27,000 for those age 50 or older, into their own 401(k). Newly established safe harbor 401(k)s can also take advantage of a tax credit created by the SECURE Act of 2019 that can be as high as $16,500 for starting a new qualified company plan. The tax credit is equal to $250 for each non-highly compensated employee who is eligible to participate in the plan with a minimum credit of $500 and a maximum credit of $5,000 for three years. Also, if a business adds an auto-enrollment feature to its plan, it can claim a tax credit of $500 per year for three years.

Safe Harbor 401 k Could Be More Cost-Effective for a Small Business

While mandatory contributions to employee 401(k) accounts can be an expensive proposition for a large company, for a small business it may be more cost-effective to make retirement contributions on behalf of employees rather than deal with the more expensive and burdensome nondiscrimination testing.

What to Do With Money in a Former Employer's 401(k) Remember the most important thing the employer may get out of making these employee contributions is keeping good employees happy. And happy employees tend to stay. This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC (opens in new tab) or with FINRA (opens in new tab). Explore More Building Wealth Mike Piershale, ChFCPresident, Piershale Financial GroupMike Piershale, ChFC, is president of Piershale Financial Group (opens in new tab) in Barrington, Illinois. He works directly with clients on retirement and estate planning, portfolio management and insurance needs. Latest 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 New, Used or Leased: Is Now the Time to Buy an Electric Vehicle? The Inflation Reduction Act created new tax breaks for electric vehicles. Here's a guide to which EVs count and the best time to buy. By Rivan V. Stinson • Published 11 November 22 You might also like 4 Ways You Can Take Advantage of a Down Market With markets down for the year, it may seem that all the news is bad. But now could be a good time to make some profitable moves. By Adam Grealish • Published 11 November 22 Finding Peace of Mind With Your Retirement Income Even in tough times, you can secure retirement income that lets you maintain your lifestyle, lasts a lifetime, adjusts for life events and leaves a legacy for the kids. By Jerry Golden, Investment Adviser Representative • Published 10 November 22 What to Do When an Unhappy Customer Threatens to Ruin Your Rep Some customers go too far when they feel they haven't been treated well, demanding unreasonable make-goods and even resorting to extortion. An attorney offers some advice. By H. Dennis Beaver, Esq. • Published 10 November 22 Rising Interest Rates Change the Math on Pensions for Some Would-Be Retirees Now is a good time to think about when and if to take a lump sum on your pension and what to do with it. Let's explore the pros and cons. By Michael Aloi, CFP® • Published 9 November 22 Counterattack: Tips for Thwarting a Will Contest From contentious relatives to scam artists, wills are not immune to the threat of a contest. If you have an inkling such a fight could be in your estate's future, here are some ways to limit the risk. By Linda Kotis, Esq. • Last updated 10 November 22 5 Steps to a Stronger Financial Plan It's impossible to be right all the time, but a strong plan and constantly assessing where you are can help you pivot when bad things inevitably happen. By Eric Roberge, Certified Financial Planner (CFP) and Investment Adviser • Published 8 November 22 5 Survival Tips for the Bear Market It's been a painful year for investors, but focusing on the long term and implementing constructive actions can help weather the turbulence. By Daniel Kern, CFA®, CFP® • Last updated 8 November 22 Can You Protect Your Retirement From Natural Disasters? Hurricanes, wildfires and floods have wreaked havoc in the U.S. this year. Having a disaster plan in place could help protect you financially in the moment and the aftermath. By Ken Moraif, CFP® • Published 7 November 22 View More ▸ kiplinger About Us (opens in new tab) Terms and Conditions (opens in new tab) Privacy Policy (opens in new tab) Cookie Policy (opens in new tab) Kiplinger is part of Future plc, an international media group and leading digital publisher. Visit our corporate site.
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