- A safe harbor 401(k) plan is a simpler version of a traditional 401(k) retirement plan.
- Employers with safe harbor 401(k)s must contribute to employee accounts through matching or non-elective contributions.
- In return, employers are able to avoid burdensome testing requirements.
Small business employees can build long-lasting wealth with a Safe Harbor 401(k) plan. Safe Harbor 401(k) plans are considered one of the best retirement plans, offering tax advantages and matching benefits. Plus, employers can avoid the hassle of annual nondiscrimination testing.
These specialized 401(k) plans come with a litany of regulations, as administrators can bypass some standard 401(k) rules to remain flexible. Here is our safe harbor 401(k) setup guide.
What is a safe harbor 401(k)
Here is the safe harbor 401(k) 's role in your retirement saving journey.
Definition and overview of safe harbor 401(k)s
Many employers offer a sponsored 401(k) plan to help employees regularly save toward their futures, defer a portion of their income, and earn matching contributions. A safe harbor 401(k) can be a more practical option for smaller businesses as it eliminates the need for annual nondiscrimination testing, a requirement for traditional 401(k) plans.
Safe harbor 401(k) plans have the same contribution limits, withdrawal rules, and compounding power as traditional 401(k) plans. But the vesting rules are different.
If your employer offers a safe harbor 401(k), they must meet specific notice requirements, supplying you with important details within a certain timeframe. Review those documents to ensure you understand how the plan works and how you can make paycheck deferrals to maximize your savings.
If you have questions, contact your company's human resources team.
Key features and requirements for safe harbor 401(k)s
To qualify for a safe harbor 401(k), businesses must supply employees with contributions that are fully vested at the time they are made. Further, employers offering these plans must adhere to certain notice requirements, obligating them to give eligible employees plan information within a reasonable timeframe.
Employers must give employees notice by December 1, 2024, to add a safe harbor plan for 2025.
Benefits of a safe harbor 401(k)
Both employers and employees benefit from safe harbor 401(k) plans.
Simplified compliance
Safe harbor retirement plans offer simplified compliance by eliminating the need for annual nondiscrimination testing. Small businesses, in particular, should use safe harbor 401(k) plans since they could face a greater risk of failing nondiscrimination testing.
Since safe harbor 401(k) plans are exempt from nondiscrimination testing and top-heavy testing, Chad Rixse, CRPS and founding member at Kiplinger Advisor Collective, says, "They're the easiest plan to administer and generally have the fewest administrative and legal headaches in the long run."
Employers offering traditional 401(k) plans must also conduct top-heavy testing, which looks at the assets of key employees, owners, and officers of a company who met certain income or ownership requirements at any time in the year before the testing date. Companies with a smaller employee head count that lose a single worker could significantly impact contribution ratios.
Employer contributions
Like traditional 401(k)s, safe harbor plans can offer employer-matching contributions up to a set percentage. This is essentially free money for employees, and employers can more easily recruit and retain employees.
"For employers, a safe harbor 401(k) plan can ensure that all employees get treated equally when it comes to participating in the company's 401(k) plan and receiving employer matching contributions," says Rixse.
In addition, employer contributions are immediately fully vested, eliminating the need to develop and follow a vesting schedule.
Employer and employee tax-benefits
Employees can defer a portion of their salary into a safe harbor 401(k) for an immediate tax break. The invested funds grow tax-deferred. So, you won't have to pay tax on those contributions until you withdrawal later in retirement.
Employers can offset the cost of plan administration with up to $16,500 worth of tax credits over three years. Employers receive $500 per year for implementing auto-enrollment in the plan.
Types of safe harbor 401(k) plans
There are several kinds of safe harbor 401(k) plans, nearly all providing full and automatic contributions vesting. Here is a breakdown of the different types:
- Basic matching safe harbor: A basic matching safe harbor 401(k), also known as an elective safe harbor plan, provides a 100% match of the first 3% of an employee's contributions. After that, employees receive a 50% match for the next 2% contributed. These contributions are immediately vested.
- Enhanced matching safe harbor: Under this option, an employer can provide a 100% match of the first 4% contributed by an employee, up to 6%
- Qualified automatic contribution arrangement (QACA): Employees are automatically enrolled to contribute 3% of their compensation to their 401(k) plan. Employers can choose to either make a 3% non-elective contribution or match 100% of an employee's contribution up to 1% of their compensation. After that, employers match 50% of contributions up to 6%.
QACAs deviate slightly from the other safe harbor plan designs in that employer contributions are not fully vested until the employee reaches two years of service.
How to set up a safe harbor 401(k)
Plan design and setup
Start by creating a plan document outlining how you want contributions handled and whether you're offering employees a match or non-elective contributions. The eligibility compensation definition and instructions on making saving elections should also be included, along with vesting rules and withdrawal provisions.
Employee notices
Employers must provide their employees written notice of the obligations and rules of safe harbor 401(k) plans, especially if the plan includes matching benefits or automatic enrollment features. Notices should be given at least 30 days, but no more than 90 days, before the start of the plan year.
Contribution limits and deadlines
You can contribute up to $23,000 to a safe harbor 401(k) if you're younger than 50. Employees 50 and older can contribute up to $30,500 per year.
Make sure you're familiar with the following deadlines:
- September 1: The deadline for sending out plan notices to employees is the initial year of offering a safe harbor plan.
- October 1: The deadline for establishing a new safe harbor 401(k). At this point, your plan should already be set up, and employees should be informed of the plan start date and matching contribution rules.
- November 20: The deadline for adding a matching provision to your plan.
- December 1: The deadline for employees to give a 30-day notice if you added or modified the safe harbor plan. This is also the deadline for adopting a 3% non-elective provision. Non-elective provisions added to safe harbor 401(k)s after this deadline must be at least 4%.
- December 31: The deadline to add a 4% non-elective contribution.
- January 1: Match contributions go into effect.
Comparison with traditional 401(k) plans
Safe harbor and traditional 401(k) plans differ in terms of their contribution requirements and vesting schedules. While the former has specific contribution criteria, namely making either non-elective contributions or matching employee contributions, the latter has greater flexibility.
Employers with traditional 401(k) plans can match employee contributions, make non-elective contributions on behalf of their employees, or do both.
Traditional 401(k) plans can outline specific vesting schedules, allowing employees to gain more access to employer contributions over time. Safe harbor 401(k) plans, except for QACAs, provide full vesting of all employer contributions at the time they are made.
"For employees, a safe harbor guarantees that they'll receive an employer match if they contribute to their 401(k), versus a traditional 401(k), in which they may not receive an employer match at all," Rixse says.
Both safe harbor 401(k) and traditional 401(k) plans have a 2024 contribution limit of $23,000. Employees over 50 can contribute an additional $7,500.
FAQs for safe harbor 401(k)s
A safe harbor 401(k) is a type of retirement plan that helps small businesses avoid certain annual compliance tests by making employer contributions. Contributions, withdrawal rules, and investment options are the same as traditional 401(k) plans.
A safe harbor 401(k) differs from a traditional 401(k) by offering immediate, full-vesting contributions and mandatory matching provision requirements. Safe harbor 401(k)s are also not subject to annual nondiscrimination testing.
Employers can benefit from a safe harbor 401(k) by simplifying compliance, reducing administrative burden, and gaining tax credits.
The types of employer contributions required for safe harbor 401(k) plans are either non-elective contributions or matching contributions to employee accounts.
Yes, employees can contribute to a safe harbor 401(k) with elective deferrals subject to the same limits as traditional 401(k) plans. In 2024, employees younger than 50 can contribute up to $23,000 or up to $30,500 if they are 50 or older.
