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Safe Harbor 401k

How does a Safe Harbor 401k differ from a traditional 401k? For the average employee, the difference will be almost impossible to discern. For an employer, however, the SH 401k offers a unique set of advantages that make it easier to legally operate a 401k retirement program on behalf of employees. This means that more employers will offer 401k plans, and that more employees will be able to take advantage of these high earning, tax deferred plans.

How is it different from a traditional 401k? First of all, it plan exempts employers from having to implement time and cost intensive discrimination testing that most 401k’s require to ensure that employees at all salary levels are participating equally. This is done by allowing all employees to invest maximum amounts of their earnings and by making every employee 100 percent invested in the retirement account from the very beginning. These simple, easy to understand policies take the guess work out of setting up an IRA and make employers more willing to set up these types of plans. All employers have to do is determine their own contribution and set up the paperwork.

Although offering a Safe Harbor 401k may sound like a policy that benefits employees alone, there are clear advantages for employers as well. First, having a 401k plan, especially one with employer matching, is a good way to attract and retain high quality, well trained employees. There are also direct financial benefits to employers that offer matching funds to employees, as tax benefits and write offs may apply.

If you are a business owner and your company isn’t offering a Safe Harbor 401k, you are putting yourself and your employees at a huge disadvantage. With Social Security funds dwindling by the day, most employees are aware that they cannot count on government help to finance their retirement. Not having a tax deferred form of investment such as a 401k makes your company a less desirable workplace than those of your competitors. If your employees have not left you for a business that offers the benefits they need to support themselves beyond retirement, they are merely waiting for the right offer.

If you are an employee, there are also good reasons to contribute to a Safe Harbor 401k offered by your employer. A 401k is basically a trust fund set aside for your retirement. Because your contributions are taken out of your pre-tax income, it is the cheapest and most logical way to set money aside for your retirement. If you are lucky enough to have an employer who matches your contributions, you will be able to essentially double your retirement income with no sacrifice on your own behalf. You will also have the tax advantage of having a lower gross income and having your 401k contributions grow tax free until you need them at retirement.

Whether you are an employer or a worker, a Safe Harbor 401k offers a common sense way to lower your tax burden while preparing for the future. With a variety plans available and very little preparation from employer and employee alike, this is an investment choice that makes sense in any situation.

Safe Harbor 401k
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