The conventional wisdom is that you can wait until the end of the year to put a retirement plan in place since you can still get the tax benefits for the whole year. Maybe for some purposes, but not for setting up a Safe Harbor 401(k) plan.
If you want to set up a new Safe Harbor 401(k) plan for 2018, it has to be done by October 1. What’s a Safe Harbor plan? It’s a special provision of the tax law that permits owners and other Highly Compensated Employees (HCEs) to maximize their contribution regardless of how much the Non-HCEs contribute. For 2018, the maximum is $18,500 plus a $6,000 catch if age 50 or older.
But tax planning is a series of trade-offs. One of which is that there is a cost for the Non-HCEs. The IRS requires you to contribute a minimum amount for those Non-HCEs using one of two methods.
- 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%.
Owners and HCEs can also receive Safe Harbor contributions.
Here are two more tax benefits of Safe Harbor:
- The Safe Harbor contribution could be used to satisfy the Top-Heavy requirement.
- The 3% Safe Harbor contribution can be considered as part of a New Comparability profit sharing contribution which could favor owners and HCEs.
But wait, here is one more tax benefit. An employer adopting a new 401(k) plan may qualify for a retirement plan tax credit of up a maximum of $500 per year for the first three years of the plan.
And of course, this article is for general information purposes only. Employers should always discuss the specifics of their individual situation with their tax advisor.