A retirement plan is an important benefit for most small businesses and self employed companies in today’s marketplace. This benefits attract and keep many quality key employees. There are many different qualified plans available with the most popular being the 401K established for  sole proprietorships, partnerships, limited liability corporations (LLCs), or incorporated businesses, including subchapter S corporations.  This 401k retirement plans allow employer contributions to be tax deductible and employee contributions to be excluded from IRS income.

There are two different types of 401K plans, the traditional 401K and a safe harbor 401K.  There are many similarities in both plans and a few major exceptions to consider in selecting the one that fits you best.

Both retirement plans eligibility require that the employee be at least 21 years old and  performed one year of service working at least 1000 hours in the year beginning with the date of hire. An employer can establish less restrictive but not more restrictive eligibility requirements.  They both have the same annual deferred salary contribution amounts established by the IRS and employers option for additional contributions. Key employees top heavy testing is required under either plan.  Loans are allowed in both plans but, the traditional 401 K has an option whether or not to include in the plan.  IRS has established strict withdrawal limitations for both plans with a penalty if withdrawn before the age of 591/2 equal to 10% of the amount withdrawn unless you meet certain exceptions as discussed in the 401k hardship withdrawal article.  Most of the other regulatory requirements such as funding, excluded employees, reporting & disclosure requirements and available contracts are similar under both retirement plans. The plan’s few important exceptions involving contributions and vesting could be critical to some companies depending on their financial status and goals.

The biggest difference is the traditional 401K plan can designate elective and non-elective contributions for the employees and employer matching funds, while the safe harbor 401 K has stricter employer contributions of either matching or non-elective amounts to the eligible employees. This means that the safe harbor must match 100% of the first 3% of pay deferred ,plus 50% of the next 2% pay deferred  with a maximum of 6% or contribute 3% pay deferred non-elective amounts  paid to all eligible employees. The traditional plan is flexible ,only required to match contributions subject to 401(m) test. The other exception related to contributions involves vesting which is the employee’s ownership in the value of their retirement account. The traditional plan can determine the length of vesting before employee ownership while, the safe harbor contributions are 100% vested immediately belonging to the employee. The employer may use a graded vesting schedule for discretionary contributions. The other  exception is the plan deadline which must be signed by the end of the plan year in a traditional plan and in the safe harbor must be adopted prior to the beginning of the plan year and amended to comply with GUST I and II.

These is a short simplified explanation of a safe harbor 401k retirement plan and recommend that you talk to a retirement specialist to answer all your questions before making the final decision. There are advantages for each plan depending on your goals and needs.