Are you looking for tax-saving incentives for the 2021 fiscal year? Offering Tax Savings with a Safe Harbor 401(k) plans can help maximize your tax savings and may even help retain employees.
What is a Safe Harbor 401(K) Plan?
According to IRS.gov, a safe harbor 401(k) plan is similar to a traditional 401(k) plan, but, among other things, it must provide for employer contributions that are fully vested when made. These contributions allow an owner to maximize their personal contributions freely and can ease year end required testing.
Safe Harbor 401(K) Benefits:
- Unlike traditional 401(k) plans, safe harbor plans automatically pass several required tests to keep your plan tax-qualified and avoid other penalties and costs.
- Safe harbor 401(k) plans that do not provide any additional contributions in a year are exempted from the top-heavy rules of section 416 of the Internal Revenue Code.
- The business owner can:
- Contribute the maximum annual deferral amount to his/her own 401(k) plan ($19,500 for 2021 plus another $6,500 for people 50 years and older);
- Receive additional savings from the company’s matching contributions; and
- Deduct applicable employee and employer matching contributions from the company from their taxes.
- Newly established 401(k) plans may also be eligible for tax credits of $250 per eligible employee to cover the costs associated with a 401(k) plan.*
- Safe harbor plans are for employers of any size and may be combined with other retirement plans.
Maximize your 2021 Savings.
To take advantage of these tax savings, Safe harbor plans must be in effect three months before the plan year-end date, which means eligible employees must be able to make salary deferrals starting no later than the first pay date on or following October 1, 2021. Our deadline for signed intent to establish a new Safe Harbor plan is August 15, 2021.
Switching over to a Safe Harbor 401(k) Plan is Simple.
If you already have a retirement plan set in place, no worries. You can amend your retirement plan solutions to take advantage of Safe Harbor benefits.
Here are some important dates to remember if you plan on making this change:
- November 30, 2021– On or before this date, your provider can help amend your current retirement plan and get you started with a new safe harbor plan for the upcoming year.
- December 1, 2021– You must provide your employees with a notice of plan provisions so they can make an informed decision.
- January 1, 2022– Your Safe harbor provision takes effect and exempts the plan from certain nondiscrimination testing.
Overall, any retirement offering comes with benefits, but a Safe Harbor plan may be a smart decision for many companies, especially for small to medium-sized business owners. If you have any questions about whether a Safe Harbor plan is right for your business, contact us today at retirement@cpsgo.com or fill out the form below.
* Corporate Payroll Services and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
