Back in April, I wrote that the Retirement Plan Season Starts Now.
“Now” literally means now for an employer who wants to start a new 401(k) plan this year and take advantage of special tax rules that allow the plan to automatically pass the 401(k) discrimination tests.
Historically, many calendar year end companies have waited until late December to establish a new retirement plan. Employers have said “as long as my plan is in place by December 31, can’t my company consider the entire year for purposes of contributions and tax deductions?”
The answer to which is generally “yes” for most types of retirement plans, but there is a big exception for new Safe Harbor 401(k) plans.
October 1 is the due date for an employer to establish a new 401(k) plan using those special “Safe Harbor” contribution rules to permit owners and other Highly Compensated Employees to maximize their contributions regardless of how much the Non-Highly Compensated Employees contribute.
It works something like this. The employer can make one of two types of Safe Harbor 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%.
Bottom line: Owners and other Highly Compensated Employees would be able to defer the entire $17,500 maximum plus an additional $5,500 for those over age 50…and also receive the Safe Harbor contribution.
How is this possible if a plan is established on or before October 1? It’s simply that the 401(k) individual limit is a personal calendar year limit even though the 401(k) plan would have been in effect for less than the full year.
Here are the four things needed to get done on or before the October 1, deadline.
- The TPA provides a plan document.
- The employer establishes a trust account.
- The advisor helps the employer select a 401(k) provider.
- The adviser helps communicate the plan to the employees.
There is still time for an employer to establish a new 401(k) plan, and maybe even qualify for the retirement plan start-up tax credit.
This article is for general information and discussion purposes only. Employers and employees should always seek the advice of experienced tax advisors for the application of the tax rules to their specific situation.
Jerry Kalish is an Advisory Board member for Employee Benefit Adviser and President of National Benefit Services, Inc., a Chicago-based third party administrator. He is a Guest Lecturer at John Marshall School of Law LLM Program in Employee Benefits and services on the Great Lakes IRS Advisory Council for Tax Exempt and Government Entity Plans. Jerry has been publishing The Retirement Plan Blog since 2006. He can be reached via email at email@example.com and followed on Twitter.
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