As we approach the end of the third quarter, many small businesses are starting to tax plan for year-end 2020. 401(k) plans are a valuable benefit for employees that allow them to save for retirement, while also providing tax and other benefits for employers. If you are looking into a retirement option for 2020, it is important to note that some of the options for small employers have deadlines on October 1st.
Safe Harbor 401(k) Plans must be setup before October 1, 2020.
The safe harbor 401(k) plan is not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans, making it the most popular plan type for small businesses. These plans allow owners of a company to maximize their plan contributions, up to $57,000 for 2020! If you are looking into a new safe harbor 401(k) plan, please note these must be setup by October 1, 2020 and can often take a few weeks days to setup.
Employers can allocate safe harbor 401(k) contributions in one of three ways:
-
Employer matches 100% of the employee’s elective deferrals, up to the first 3% of compensation, plus 50% of the employee’s elective deferrals, up to the next 2% of compensation.
-
Employer matches 100% of the employee’s elective deferrals, on the first 4% of compensation.
-
Employer contributes 3% of compensation to all eligible employees.
-
Employer may also make additional, discretionary contributions if desired.
For companies with a retirement plan already in place, now is the time to think about helping employees maximize annual deferrals and take advantage of a company match, while also maximizing tax deferrals for the owners.
If you currently have a profit-sharing plan, please let us know so your company's year-end reporting is accurate.
The personal deferral limit for 401(k) plans in 2020 is $19,500 for an individual. For participants age 50 or older, most plans allow an additional catch-up contribution of up to $6,500. Any contributions the company chooses to make are in addition to these limits.