The Internal Revenue Code establishes the maximum amount that you can contribute on a tax deferred basis to your retirement plan (currently $22,500/year or $30,000 if you are over age 50).
401(k) Plans are subject to certain “savings tests” that can limit how much company owners and Highly Compensated Employees can personally save. This test often limits the savings of the owners and HCE’s to roughly 5% of their annual pay. This savings rate is not nearly sufficient enough to meet your retirement needs.
Safe Harbor Benefits
Satisfies IRS Testing
- Eliminate “savings tests”
- Allow Owners and HCE’s to maximize personal salary deferrals ($22,500—$30,000)
Aids in Hiring and Retention
- Seen as a valuable employee benefit with significant name recognition
Creates Tax Efficiency
- Owners and HCE’s maximize deductions through personal savings and a company contribution that is all tax deductible
Safe Harbor Details
There are 2 common Safe Harbor methods to choose from. For new 401(k) plans, the deadline to establish is 10/1/2023. If you are an existing 401(k) plan, you can add a 3% Non-Elective util 12/31/2023 or a 4% Non- Elective until your tax filing deadline.
Traditional Match
- Match an employees personal deferrals up to 4% of their annual pay. 100% vested
Non-Elective 3%
- Match an employees personal deferrals up to 4% of their annual pay. 100% vested.
And…your tax savings can cover the cost of employer contributions to your employees, as the table below illustrates.
2023 401(k) With Safe Harbor Match
| Eligible Members | Compensation | Personal Deferrals Step #1 | Max SH 4% Match Step #2 | Projected SH Match Step #2 | Total Contribution | Estimated Tax Savings 40% Tax Brackets |
|---|---|---|---|---|---|---|
| Partner #1 | $150,000 | Up to $3,000 | Up to $6,000 | $6,000 | $36,000 | $14,400 |
| Partner #2 | $150,000 | Up to $3,000 | Up to $6,000 | $6,000 | $36,000 | $14,400 |
| 10 Eligible EE’s | $775,000 | Varies | Up to $31,000 | $15,000 | $15,000 | $6,000 |
| Projected Annual Compliances Costs | $2,290 | $916 | ||||
| Projected Start-Up Tax Credit (3 years) | $1,145 | $1,145 | ||||
| Estimated Net Tax Savings (Total Tax Savings-Company Contribution) | $19,571 |