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Safe Harbor 401(k) Plans

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Definition:

A Safe Harbor 401(k) Plan is a specific type of 401(k) plan that encourages employee participation and that provides employers more leniency in setting up plans, without concerns about discrimination in favor of highly compensated employees. The Small Business Job Protection Act of 1996 provided for this new type of 401(k).

Defined contribution plans, like regular 401(k) plans, must comply with IRS requirements to avoid discriminating in favor of highly compensated employees (HCE's) with "top heavy" plans (paying these HCE's more as a percentage of pay than other employees). In a Safe Harbor 401(k) plan, all contributions must be fully vested immediately, The employer also must provide appropriate notice to employees about their rights under the plan.

 

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