Retirement planning is arguably one of the most important steps we can all take to ensure that we have some measure of certainty in our future. Of course, we can’t control for everything, but having some money put away into a good retirement fund goes a long way in keeping our futures secure.
For businesses, this often means that they need to provide their employees with a competitive retirement plan, if they hope to hold on to good workers for long periods of time.
Unfortunately, it’s not always as simple as just starting a 401k plan and letting the chips fall where they may. In fact, the IRS imposes three tests of nondiscrimination to ensure that all 401k plans are fair for employees within a company.
Luckily, with a Safe Harbor plan, businesses don’t need to worry about these IRS tests, as they are exempt from the requirements due to how their 401k plan is structured.
IRS Compliance Testing
Essentially, there are three tests that the IRS runs every year to ensure that companies are not favoring their top employees and allowing their lower-wage earners to suffer unfair treatment with regards to their 401k plan.
Specifically, these tests are known as the Top-Heavy Test, the Actual Contribution Percentage Test, and the Actual Deferral Percentage Test.
Each one of these tests looks at a slightly different component of a company’s 401k contributions, but all of them serve to protect employees within a business’s retirement plan structure.
401k Plan Changes for 2022
In 2022, the total limit on contribution amounts for an individual’s 401k plan is $61,000 if the person is under 50 years old, and $67,500 if the person is over the age of 50.
Furthermore, the maximum amount of compensation for which employers are required to match is now $305,000. This is an increase from previous years where the maximum amount was $290,000.
Additionally, the definitions of “highly-compensated earners” has changed slightly for 2022. Now, an HCE is anyone who has earned $135,000 or more in 2021 or maintained at least 5% ownership in the company. Beyond that definition, “key employees”, or those who will earn over $200,000 in 2022 need to own less than 60% of the retirement plan balance. If not, the plan is considered top-heavy and the company will fail at least one of the three IRS tests of compliance.
Safe Harbor Deadlines for 2022
If you plan to start a Safe Harbor 401k plan using matching requirements for your company this year, you must do so by October 1st 2022. On the other hand, if you wish to start a Safe Harbor 401k plan with nonelective contributions, you’ll have until December 2nd of 2022.
While these deadlines are not for quite a few months, it’s never too early to get started on setting up your retirement plan. After all, time can get away from you quickly when you’re running a business!
Contact a plan provider today to get your company set up with a Safe Harbor plan!