3 Advantages of a Safe Harbor 401k Plan

The safe harbor 401k plan is much like a traditional 401k with a few key differences. Many business owners prefer this model over the traditional style of 401k. Here are some of the advantages that you can realize by investing in a safe harbor 401k plan.

1. No Non-Discrimination Testing

The biggest advantage of this type of retirement plan is that there is no non-discrimination testing. With a traditional 401k, the company has to go through non-discrimination testing every year. This is a process that makes sure that upper-level employees are not contributing a higher percentage of their income than lower level employees. This looks at highly compensated employees that make more than $110,000 or have more than 5% ownership in the company. It compares the percentage is that they put into the plan against the percentages that non-highly compensated employees put in. When this happens they look to see if the discrepancy between the 2 groups is larger than 2%. If it is greater, they deduct money from the highly compensated employee's accounts in order to get the percentage back into alignment. This process can be time consuming and can lead to problems. With a safe harbor 401k, this will never be an issue. 

2. Set Aside More Money

Another advantage of this type of retirement plan is that you can set aside more money regardless of what type of employee you are. Thanks to the lack of non-discrimination testing, you can put the maximum amount of money into your 401k every year. As of 2010, you can put as much as $16,500 into your account every year. If you are over 50, this means you can put up to $22,000 in your account. When you have to worry about how much other people are putting in their accounts, it provides a level of uncertainty to the process. With the safe harbor 401k, you can decide in advance exactly how much you want to set aside. 

3. Unique Matching 

Another unique advantage to this type of retirement account is that it has a unique matching feature that is unlike traditional 401k's. With the safe harbor 401k, every employee gets three percent of their salary put into the 401k for them. This occurs regardless of whether they contribute anything to the account or not. This is essentially like getting a three percent bonus that goes towards your retirement every year. 

In addition to that, employees can earn additional money towards their retirement account. For every dollar that is put into the account above 3% and up to 5% of their income, employees will receive a $0.50 match. This provides them with additional free money that they can use to build their retirement. They can then take this money and use it to invest in many different securities such as stocks, mutual funds, and bonds. The returns that they generate will grow tax-free which amplifies the amount of free money that you accumulate. 

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