Safe harbor 401(k) plans are not subject to yearly contribution testing and are required to have employer contributions. As of 2015, these plans require either a set percentage contribution of 3 percent of employee income from the employer each year or a matching contribution system, according to Bankrate.Continue Reading
These plans were designed for businesses wishing to avoid the yearly testing used on other 401(k) plans to determine whether or not employers are fairly contributing to retirement plans owned by non-management employees, according to the IRS. The safe harbor 401(k) is not subject to the same nondiscrimination tests as the other 401(k) plans. This system encourages employers to make regular contributions and allows businesses to benefit from less regulation from the federal government. Many businesses now prefer these plans and use them to minimize paperwork and expenses.
Safe harbor plans also require businesses to adequately inform employees of their options and rights, states the IRS. Employees are provided information at least 30 days before the beginning of a new plan year, which ensures a reasonable amount of time to make plan changes and decisions. Notice must be provided no more than 90 days before the new plan year, and it is usually provided in writing.Learn more about Financial Planning