Safe Harbor 401K Definition

Safe-Harbor 401k

What is the definition of a safe harbor 401k? This is a specific type of 401k plan that is available to many employees, but there are some unique factors involved with this type that may make it a better choice. This type of plan first became available in 1996, when the Small Business Job Protection Act allowed 401k plans to use simpler methods to meet the requirements for non-discrimination in these plans. The maximum 401k contribution per year may allow for certain catch up contributions with this plan type, just like with other versions, and any plan which uses the alternative method to prevent discrimination is classified as a safe harbor 401k.

The average 401k balance by age shows that these plans can be very successful at saving for retirement. Until 1996 the administrative responsibilities involved in providing a 401k plan for employees was so burdensome that few small business owners set up a plan for employees. The safe harbor 401k plans have changed this, and made it much easier for small businesses to give their employees this option. Non discrimination is shown because all of the employer contributions made are fully vested immediately. Until these plans were created the comparison of IRA vs 401k was much more difficult for many people.

A safe harbor 401k provides a much wider access to a retirement savings plan for small business employees. These plans can also be a good choice for self employed retirement plans because of the simplified requirements. The flexibility that these plans allow have helped many employers offer these plans, and given many thousands of employees access to a retirement savings vehicle. A safe harbor 401k eliminates many of the complex rules concerning taxes and administration of these plans, so that smaller businesses will also benefit. Immediate vestment of employer contributions to this type of plan ensures that highly compensated employees are not treated better than other employees.