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In the case of saving for retirement, 401(k) plans are a well-liked alternative for each employers and employees. Nonetheless, not all 401(k) plans are the identical. Employers can choose from a standard 401(k) plan and a Protected Harbor 401(k) plan, each offering unique features and advantages. Whether you are an employer or worker, it is important to know the differences between these 401(k) plans.
Planning for retirement? A financial advisor can enable you to chart a path toward your personal and financial goals.
A Protected Harbor 401(k) is a kind of retirement savings plan that meets specific Internal Revenue Service (IRS) requirements but allows an organization to avoid complex testing requirements by meeting certain contribution and vesting standards. These tests aim to be certain that contributions to the plan don’t disproportionately favor higher-income employees over lower-income employees.
Protected Harbor plans mandate that employers contribute to worker accounts in one in all the next ways:
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Non-elective contributions: Employers make a set contribution (a required 3% minimum of an worker’s compensation) to all eligible employees, no matter whether employees contribute to the plan themselves.
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Matching contributions: Employers match a percentage of worker contributions, 100% of the primary 3% of salary and 50% of the following 2%.
Moreover, Protected Harbor contributions are immediately vested, meaning employees fully own these contributions as soon because the employer makes them. This feature makes Protected Harbor 401(k)s particularly attractive for workers looking for guaranteed employer contributions without the chance of losing funds in the event that they leave the corporate.
Employers of any size can offer Protected Harbor 401(k) plans.
The predominant differences between a Protected Harbor 401(k) and a traditional 401(k) lie of their employer contributions, compliance requirements and advantages for workers. Here’s a more in-depth look:
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Employer contributions: While traditional 401(k) plans offer flexibility in employer contributions (which can or might not be provided), Protected Harbor plans require mandatory employer contributions. These contributions can either be non-elective or match a portion of worker contributions.
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Compliance testing: Traditional 401(k) plans are subject to annual nondiscrimination tests, which assess whether contributions disproportionately favor highly compensated employees. Protected Harbor plans, however, are exempt from these tests if employers meet the required contribution and vesting rules.
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Vesting schedules: Traditional 401(k) plans often include a vesting schedule, meaning employees must work for the corporate for a certain variety of years before they fully own the employer’s contributions. In contrast, Protected Harbor contributions are immediately vested, offering greater security for workers.
