Safe Harbor 401(k)

What is a Safe Harbor Plan?

A Safe Harbor 401(k) plan is a type of 401(k) with an employer match that allows you to avoid most annual compliance tests. If a 401(k) includes a Safe Harbor provision, the employer makes annual contributions on behalf of employees, and those contributions are vested immediately. Two of the three types of Safe Harbors involve employer matches, so you may sometimes hear people refer to a "Safe Harbor Match."

What is a Safe Harbor Match?

A Safe Harbor Match is an employer contribution and can be set up in one of three ways; a Non-Elective Safe Harbor, a Basic Safe Harbor Match, or an Enhanced Safe Harbor Match. A Safe Harbor Match is a form of mandatory employer contribution. There are three types of mandatory employer contributions, two of which are technically matches:

Non-Elective Safe Harbor: Eligible employees get an annual employer contribution of 3% of their salary. This amount is immediately fully vested and the employee gets it whether or not they contribute to the plan.
Basic Safe Harbor Match: The employer matches 100% of the first 3% of each employee’s contribution and 50% of the next 2%. Employees are required to contribute to their 401(k) in order to get the match.
Enhanced Safe Harbor Match: The employer matches 100% of the first 4% of each employee’s contribution. Like a Basic Safe Harbor Match, employees are required to defer money to their 401(k) in order to qualify for the match.

BENEFITS OF ADDING A SAFE HARBOR PROVISION TO YOUR 401(k)

By adding a Safe Harbor provision to your 401(k), your highly compensated employees will likely be able to max out their retirement contributions and you won't have to worry about annual compliance testing. Highly compensated employees are people that work at your company and own at least 5% of the company, are family of someone who owns at least 5% of the company, or who earn more than $130,000 (as of 2020, adjusted for inflation).

Exempts your 401(k) plan from most annual compliance testing.
Optimizes you and your highly compensated employees’ personal retirement savings because you’ll be able to contribute the maximum to your
401(k).
As with any employer contribution, employer contributions reduce an employer's taxable income.

If your plan fails compliance testing, and you don’t add a Safe Harbor provision, then the top earning employees may be significantly limited in what they can contribute toward their 401(k) plan. In fact, a general rule of thumb is that they can’t contribute more than 2% more than the average of all employees who are not highly compensated.

Download Our Guide to Small Business Retirement Options

Important Considerations of a Safe Harbor Provision

There are a few items to consider when adding a Safe Harbor provision. For starters, it’s important to be aware that employer contributions are immediately 100% vested. This means employees can take their money with them if they leave your company, versus being earned over time. Employer contributions are required each year so it’s important your company has a reliable, steady stream of income. And lastly, in order to be effective by January 1, Safe Harbor provisions must be established by October 1.

WHEN A SAFE HARBOR PLAN IS A GREAT OPTION

Your 401(k) plan has recently failed annual compliance testing.

You and your highly compensated employees are not able to contribute the maximum to your 401(k) account due to the risk of failing compliance testing.

You have been forced to make employer contributions in the past.

Many of your non-highly compensated employees don't contribute to the 401(k) plan.

Here are some example scenarios of when Safe Harbor could be right:

Businesses with Fewer than 10 employees

If you have 10 employees, including owners. And two highly compensated employees want to contribute the maximum to their 401(k), but the rest of the employees aren't contributing, then Safe Harbor will help. Adding Safe Harbor will allow the two employees to contribute the maximum and the plan will pass compliance testing.

businesses with 50 to 80 employees

If your business has 50 to 80 employees and those who are highly compensated want to max out their 401(k) contributions, while others are not contributing at all, then a Safe Harbor provision can help. This way your employees who want to contribute the maximum can, and you can even add a profit sharing component—and still pass compliance testing.

businesses with “top-heavy” 401(k) plans

If your 401(k) plan is "top heavy," which means that the portion of 401(k) assets allocated to owners and other key employee is greater than 60% of the total assets in the plan, then the employer Safe Harbor contribution will allow key employees to maximize 401(k) contributions.