October 1 deadline approaches for new Safe Harbor 401(k) plan

Tempus fugit is a Latin expression meaning "time flees", more commonly translated as "time flies'.

Today it's frequently used as an inscription on clocks or artwork like the one pictured here.

But this being The Retirement Plan Blog, there is, of course, an ERISA connection. “Timing matters” is one theme that consistently runs throughout ERISA, and one of those matters is the October 1 deadline to set up a new Safe Harbor 401(k) plan.

Back in the day, calendar year taxpayers could wait until year end to set up a new plan. A plan document and an initial contribution to set up a trust account were the only requirements. The plan could be effective retroactive to January 1, and a tax deduction could be taken as long as the contribution was made before the tax return was due (including extension, e.g., September 15 of the following year).

This is not the case, however, for an employer wanting to set up a new Safe Harbor 401(k) plan. The Safe Harbor rules permit owners and other Highly Compensated Employees (HCEs) to maximize their contributions regardless of how much the Non-HCEs contribute.

Under 2013 tax rules, the maximum is $17,500 maximum plus an additional $5,500 for those over age 50, or a total of $23,000.

The Safe Harbor rules require that an employer make one of two types of contributions:

  • 3% of compensation for all eligible employees, or
  • Matching contribution of 100% of the first 3% of an employee’s contribution, and 50% of the next 2% of an employee’s contribution. Thus, if an employee contributes the full 5%, it will cost the employer 4%.

These Safe Harbor contributions can be allocated to owners and HCEs, as well.

In addition, an employer adopting a new 401(k) plan may qualify for the retirement plan tax credit as discussed in our FAQs.

Picture Credit: Tempus Fugit inscription on Clock over Time Ball Building on Briggate in Leeds West Yorkshire England, Photo by Mark Sunderland.

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