If your retirement plan currently does not utilize the Safe Harbor provisions enacted as part of the Small Business Job Protection Act of 1996, then 2006 is the year to change your plan and adopt a Safe Harbor contribution formula.

Safe Harbor allows a plan to automatically pass nondiscrimination (ADP/ACP) and top heavy testing. These tests are explained later. Safe Harbor, therefore, allows business owners, their spouses and highly compensated employees to contribute the maximum 401(k) amount without concern of failing the above tests. For 2006, the maximum 401(k) contribution allowed is $15,000 plus an additional $5,000 catch-up contribution for participants who have or will attain the age of 50 during the plan year. Note that participants can contribute up to 100% of their compensation into the plan less FICA and state taxes, so spouses can keep their wages low and still maximize contributions to the plan if Safe Harbor is adopted.

A Safe Harbor 401(k) Plan requires that the employer (plan sponsor):

1) Provide an annual Safe Harbor notice to eligible employees
    30 days prior to the start of the plan year.
2) Provide a Safe Harbor contribution using one of two
    contribution options:

a) Non-elective contribution of 3% of compensation to
    all eligible participants.
b) Match contribution using this formula: 100% of the
    first 3% and 50% of the next 2% of compensation
    deferred.

Both contributions are 100% vested immediately. Safe Harbor (SH) example: An employee who earns $30,000 and defers 5% of compensation into the plan would receive $1,200 under a SH Match contribution formula and $900 under a SH Non-elective 3% contribution formula.

Safe Harbor is Affordable
If you have a $1 million dollar payroll, adopting Safe Harbor would only cost $30,000 for the nonelective 3% contribution. That’s a $30,000 employer contribution of which you receive a portion, and for which you and your spouse are able to contribute the maximum 401(k) amount without worry.

Which Contribution Formula Is Right for Your Company?
If the company’s owners(s) are slightly older than the employees, we recommend using the nonelective 3% contribution option. For most companies they can then combine the Safe Harbor contribution with a Cross-Tested profit sharing contribution. This would allow the owners to receive 9% of any compensation not exceeding $220,000 (for 2006), while providing a 3% contribution to their employees.

Cross-testing is a plan design concept which allows a company to define classes of employees and contribute profit sharing contributions on a percentage basis to each class. Cross-testing requires that the plan satisfy a minimum allocation gateway where each non-highly compensated employee (NHCE) in the plan has an allocation rate that is at least one-third of the allocation rate of the highly compensated employee with the highest allocation rate, or, each NHCE receives an allocation percentage of at least 5% of the NHCE's compensation.

If the company’s owners are not older than the employees or they want to require that employees make a contribution in order to receive a company contribution, then the safe harbor match formula is right for them.

Under both safe harbor contribution formulas we recommend business owners recruit their spouses to perform work functions and earn wages from the company. In 2006, owners and spouses can contribute the maximum 401(k) contribution allowed: $15,000 plus an additional $5,000 catch-up contribution for participants who have or will attain the age of 50 during the plan year.

Using Safe Harbor to Reach Your Personal Retirement Goals
Safe Harbor allows all employees to contribute the maximum 401(k) amount. If you are not contributing $15,000 in 2006, keep in mind that saving for retirement is like exercising. If a little is done each week, after awhile the desired results are achieved. Safe Harbor will ensure that you are able to contribute the maximum 401(k) amount each year without fear of failing the nondiscrimination or top-heavy tests.

Will you have enough for retirement? Assuming you live for 20 years after retirement and you want to spend $40,000 per year, you will need approximately $466,000 at retirement if you earn a rate of return of 6%. For a more in-depth determination of how much you should be saving for retirement you can find retirement plan calculators on the internet, but we suggest consulting your financial advisor and creating a retirement plan saving strategy. Goal setting is paramount to accomplishing your retirement planing objectives.

Safe Harbor In Your Company's Compensation Package
You've probably heard the term Total Compensation Package. A Total Compensation Package includes the employee’s wages and retirement, medical and other benefits. Retirement benefits make up an important and valuable component of your employees' Total Compensation Package. One way to fund a Safe Harbor contribution is to view it within your Total Compensation Package. When providing a raise, it can be provided in salary now as cash, or in deferred salary as a contribution to the retirement plan. Safe Harbor contributions are 100% vested, so employees don’t have to wait to "own" the contribution. If you want to give your employees a 3% raise/bonus, you can fund that raise/bonus by making a 3% contribution to the retirement plan. Inform the participants that the Safe Harbor contributions are provided to them whether they are employed or not at year end. For those participants who have earned more than a 3% raise/bonus, at performance review time you can adjust their wages accordingly. This solution works well for most companies and employees.

How Do You Adopt a Safe Harbor Plan?
In order for an existing 401(k) Plan to adopt Safe Harbor for a calendar year plan, the plan must be amended before the start of the calendar year. Also, a Safe Harbor Notice must be given to the employees at least 30 days prior to the beginning of each plan year, or by December 1, to inform them of your election to utilize Safe Harbor. Contact ARS soon to have your Plan amendment and Safe Harbor notice prepared.

Safe Harbor is a permanent election. The annual Safe Harbor Notice and employer contribution deposit are required each year. If you decide in the future you no longer want to be Safe Harbor, contact ARS and we will amend your plan to remove Safe Harbor.

Simplified Definition: Nondiscrimination (ADP/ACP) Testing
Nondiscrimination tests compare the current year contributions (401(k) and match) of Highly Compensated Employees (HCE) to those of Non-Highly Compensated Employees (NHCE). The nondiscrimination test which applies to employee 401(k) deferrals is the Actual Deferral Percentage (ADP) test and for the employer matching contributions is the Actual Contribution Percentage (ACP) test.

The ADP test is satisfied if the average ADP (employee contributions divided by wages) for HCEs does not exceed the ADP for NHCEs multiplied by 1.25, or if the ADP for the HCEs does not exceed the ADP for the NHCEs by more than 2 percentage points and the ADP for the HCEs is not more than twice the ADP for the NHCEs. The ACP test must also pass by similar rules.

For 2006 an employee is considered an HCE if in the prior year they earned more than $95,000 or own more than five percent of the business in the current or preceding year. Ownership is also attributable to spouses and lineal ascendants and descendants (i.e., parents and children) of each owner. Employers can limit the HCEs to the top 20 percent of employees meeting the plan eligibility requirements and earning more than $95,000.

For a complete description of Nondiscrimination (ADP/ACP) Testing, please visit our website at www.ars401k.com and access the newsletter titled "What All 401(k) Plan Sponsors Should Know."

Simplified Definition: Top-Heavy Testing
A Top-Heavy test takes all plan assets and compares the assets held by key employees to the assets held by non-key employees. If key employees hold more than 60% of all plan assets, the plan is considered top-heavy.

In order for the key employees to contribute to a top-heavy 401(k) plan, a top-heavy minimum contribution equal to the largest deferral percentage made by a key employee, up to 3 percent, must be contributed by the employer.

For a complete description of Top-Heavy , please visit our website at www.ars401k.com and access the newsletter titled "What All 401(k) Plan Sponsors Should Know." Contact Administrative Retirement Services, Inc. immediately if you are interested in amending or setting up a Safe Harbor plan for 2006.