Q:

What are the advantages of a safe harbor 401k plan?

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Quick Answer

Safe harbor 401k plans offer benefits for employers and employees; they let small organizations contribute maximum amounts to employees' retirement accounts and may combine with other retirement plans for maximal benefits. Safe harbor 401k plans prove popular among small organizations, say analysts at Forbes, because they let companies and employees set aside ample amounts of money for retirement. Companies may match employees' contributions, and in turn enjoy exemption from some federal regulations governing administration of traditional 401k plans.

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Full Answer

When establishing 401k plans, companies select between traditional and safe harbor policies for employees. Traditional plans also contribute to employees' retirement accounts, but have restrictions on how much companies may contribute to employees' accounts. These restrictions grow moving up the income ladder, while safe harbor 401k plans let companies contribute unrestricted amounts to employees' plans. This ensures plans do not favor individuals with higher incomes.

In addition to helping plan for retirement, safe harbor 401k plans provide tax benefits for companies and their employees. Safe harbor plans reduce taxes for organizations and workers, notes Forbes. Companies can also write off safe harbor contributions on their tax forms. As an additional incentive to establish retirement savings plans, organizations with fewer than 100 employees may qualify for tax credits, issued by the federal government, to establish retirement plans.

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