Don't Miss Important 401(k) September Deadlines

Small businesses planning to launch a 401(k) program for their employees in 2010 have an added incentive to act quickly.

The Safe Harbor deadline represents the last chance each calendar year for small business owners to start a 401(k) plan that makes it easy to contribute the maximum allowed and automatically satisfy what would otherwise be time-consuming steps of IRS non-discriminatory testing. And while the government-mandated deadline for launching a Safe Harbor plan is October 1, the real deadline for small business owners is generally between September 15 and 21, as it takes 401(k) providers one to two weeks to get a new plan up-and-running.

What is a Safe Harbor 401(k) Plan?

Safe Harbor plans allow business owners to contribute the maximum deferral amount of $16,500 a year ($22,000 if 50 years of age or more) for 2010 to their own account and automatically satisfy the IRS non-discrimination testing associated with 401(k) plans. By providing a small 3 to 4% “safe harbor” match -- the amount the employer puts in to an employees 401(k) account as a percent of an employee’s salary -- any employee including the owner can give the maximum to the plan and receive the match. These employer contributions are what allow the business to avoid the hassles of working to pass government discrimination tests.

With other types of 401(k) plans, small business owners are often restricted on how much they can contribute to their own account. The amount the owner can give to a traditional 401(k) is dependent on how much other employees contribute to the plan. But for those that select the safe harbor option, owners can contribute the maximum tax-deferred without worry -- and that can be a big help in lowering personal taxes this year. And the match will be tax deductible for the business, too.

Why are Safe Harbor 401(k)s Good for Small Businesses?

Here are five good reasons for small businesses to start a Safe Harbor 401(k):

No. 1: Avoid the Headache of Non-Discriminatory Testing

Businesses that select a non-safe harbor 401(k) plan will need to proactively manage the time and hassles associated with government plan testing. Specifically, two tests must be taken. The first is the actual deferral percentage "ADP" test, which gauges employee salary deferrals, and the actual contribution percentage "ACP" test, which measures employer-matching contributions.

No. 2: Ability to Make Maximum Tax-Deferred Contributions

Currently $16,500 or $22,000 for participants over 50.  The amount an owner can contribute is often restricted to a much lower level in a non-safe harbor plan.

No. 3: Tax Credits that Make it Easy to Get Started

Businesses that have less than 100 employees, but at least one beyond the owner, qualify for up to a $500 tax credit to offset the administrative costs of the plan for each of the first three years the plan is in-place. In total, this represents savings of up to $1,500 to each business.

No. 4: Tax Breaks on Personal Return

Small business owners in the highest tax brackets can often save thousands of dollars by contributing the maximum $16,500 to their company’s plan. For example, take a company with 10 employees.  An owner in the 28% tax bracket would save $4,620 on taxes this year – an amount that would equal anywhere from two to four times the actual cost to launch and administer the plan.

No. 5: The Opportunity to Provide a Valuable Benefit to Employees

In the current economy, employees have come to expect cost-cutting measures that reduce their benefits.  By starting a Safe Harbor plan, small business owners can provide a tangible way of showing their employees that they have their best interests at heart and are looking beyond their term on the job.

A lot of times doing the right thing for employees can be a cost-prohibitive endeavor. In the case of the Safe Harbor 401(k), it’s truly a win-win as it saves time and money for everyone involved from the top down within a small business.

Stuart Robertson is general manager and principal of ShareBuilder Advisors, LLC which operates www.ShareBuilder401k.com.  ShareBuilder Advisors, LLC is a subsidiary of ING Bank, fsb.