Safe Harbor 401(k) plan is option for small business owners

August 1, 2007

The Safe Harbor 401(k) plan allows for greater tax-deferred savings than the SIMPLE IRA and avoids the bulk of the administrative expenses of the traditional 401(k). Participants are permitted to defer up to $15,500 for 2007, with an additional $5,000 catch-up available to participants age 50 and over. Adding a cross-tested plan could provide larger proportionate contributions to those closer to retirement.

Key Points

Q: What are my options regarding Safe Harbor 401(k) plans when compared with other available qualified plans? I currently have a SIMPLE IRA.

Advantages of Safe Harbor 401(k) plans. The primary reason any small business considers the Safe Harbor plan is a desire to avoid the expensive non-discrimination tests and IRS filing requirements associated with the traditional 401(k) plan. Although the SIMPLE IRA plan eliminates these expenses, there is a tradeoff. Participants in a SIMPLE IRA plan are only permitted to defer salary up to $10,500 for 2007, with an additional $2,500 catch-up available to participants age 50 and over. Traditional 401(k) participants, on the other hand, are permitted to defer up to $15,500 for 2007, with an additional $5,000 catch-up available to participants age 50 and over. Additionally, a SIMPLE IRA plan does not permit the small business to make a discretionary profit-sharing contribution.