3 Reasons Employers Choose a Safe Harbor 401k

A safe harbor 401k is largely similar to a traditional 401k with a few key exceptions. The first is that employer contributions must be fully vested, or deposited, immediately into an employee's account. The other differences include tax regulation.

#1 Less Tax Regulation

On the whole, a safe harbor 401k is subject to a more streamlined tax law. This can make it a "simpler" choice for employers.

#2 Lower Discrimination Concerns

The main difference with a safe harbor's tax treatment is the way it handles "discrimination" toward highly compensated employees. Discrimination in this sense means contributing a higher percentage of an employee's income to the 401k because that employee is a high earner for the business. A safe harbor 401k plan allows an employer to discriminate in this fashion and is not subject to discrimination reviews.

#3 More Adaptable for Large Businesses

Because the safe harbor 401k is subject to a more flexible tax law, it is well-suited for large corporations. These businesses may have huge differences in compensation between hourly employees and C-level executives. Therefore, having a 401k that allows for a diversity of options toward these employees makes more sense than having a 401k that is even across the board. A safe harbor 401k may not offer as many advantages to a small business.

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