Alternative Plan Design for a new plan that missed the Safe Harbor Deadline
The deadline to establish a new Safe Harbor 401-k Plan was October 1st and has now passed. However, there is an alternative strategy that will still produce a good outcome.
In the first year of a 401-k Plan, an election must be made on how the Non-Discrimination Test will be applied. There are two choices: Prior Year or Current Year.
If the Plan elects the Prior Year Testing method, the Highly Compensated Employees will be allowed to defer 5% of pay plus the Catch-Up (if eligible) in the first year of the plan regardless of the Non-Discrimination Test results. For a 50 year old Highly Compensated Employee with income of 275k, this equates to a 19,750 dollar deferral for 2018. Not quite the 24,500 dollar maximum but still a good result.
The plan will then have the option to adopt a Safe Harbor provision in 2019, provided that the election is made before December 1st 2018. Most plans that employ this strategy will also utilize a Profit Sharing Contribution that will feature a Cross-Tested Allocation to favor key employees at the company.
If you have any questions about this or any other qualified plan topics, please do not hesitate to contact Eric Petersen at (510) 790-1096 or [email protected].