Money Matters: Safe Harbor 401k

Money Matters

Almost all of us have heard of a 401k but we haven't heard of a safe harbor 401k. What is that?

A safe harbor 401k is really nearly the same thing as a 401k. If you have a qualified retirement plan the government requires that there's certain non discrimination test that you must do. In essence a 401k can't have more then 60 percent of fine assets in the key people of highly compensated people. That's a discrimination test.

Why do they use a discrimination test? What are some of the parameters of something like that?

They want to make sure if it's a qualified plan, you have to be fair to everyone. You can't have most of the assets going into the owner's hands or the highly compensated. And so if you do, you're top heavy is what they call it and there's a couple ways they can mitigate it. One of them is you do a safe harbor. A safe harbor says the company is going to put in 3 percent of a persons pay for everyone all they way straight across the board. And 100 percent vested. The second way you can do it is anyone who's contributing they can match it dollar for dollar for the first 3 % and fifty cents on the dollar for the next 2%. That's a couple ways to mitigate the discrimination test make you compliant.

Can any size company do this?

Yes in fact if you have a 401k you have a discrimination test you have to do every year.

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