As the sign under the clock pictured above says, tempus fugit, or ‘time flies’ translated from the Latin.
This being The Retirement Plan Blog there’s an ERISA connection, of course. Much of ERISA involves meeting deadlines. This one is about establishing a new retirement plan.
Before 401(k) plans were invented, an employer with a calendar year end could wait until year end to set up a new plan. The only requirements were a signed plan document and an initial contribution to set up a trust account. 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.
Except if that new plan was a Safe Harbor plan in which case, it had to be established by October 1. (The same 3-month deadline also applies to adding a Safe Harbor provision to an existing profit sharing plan).
Meeting the deadline allows owners and other Highly Compensated Employees (HCEs) to maximize their contributions regardless of how much the Non-HCEs contribute. Under 2015 tax rules, the maximum is $18,000 plus an additional $6,000 for those over age 50, for a total of $24,000.
In return for which, 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.
One more possible tax benefit: an employer adopting a new 401(k) plan may qualify for the retirement plan tax credit as discussed in our FAQs.
October 1 is fast approaching.
Image, via Flickr, The Bear Tavern, Bearwood, Birmingham City, England, Tim Ellis