By making this commitment, employers receive a “Free Pass” from required plan testing. This means that highly compensated employees may defer the IRS maximum without fear of refunds to correct a failed test. Employer contributions are tax deductible and employee contributions are excluded from income for Federal income tax purposes.
Sole proprietorships, partnerships, limited liability corporations (LLCs), or incorporated businesses, including subchapter S corporations, may establish a 401(k) plan. All eligible employees must be allowed to participant in the 401(k). An eligible employee is any employee who: is at least 21 years old has performed one (1) year of service and worked 1,000 hours in the year beginning with the date of hire. Union employees and non-resident aliens who have no U.S. source of income may generally be excluded from coverage. Note: An Employer can establish less restrictive eligibility requirements than the ones listed above, but not more restrictive ones.
Employer contributions are tax deductible for the Employer – up to 25% of compensation of all participants. Employee elective deferrals are excluded from the employee’s income for federal income tax purposes. Tax-deferred growth potential is possible – any investment earnings grow tax deferred until withdrawn.
Generally, the deadline to establish a new plan is anytime between January 1 and October 1 of the applicable year. Existing plans may convert to Safe Harbor if the plan is amended and notice is provided by December 1st of the preceding plan year.
