Frequently Asked Questions

Safe Harbor

What is a Safe Harbor plan?

Employers can avoid non-discrimination testing (ADP, ACP and Top Heavy) by adopting a safe harbor 401(k) plan. Adopting a safe harbor plan allows highly compensated employees (HCEs) and key employees of the company to contribute the maximum amount allowed by law.

What are the requirements of a Safe Harbor plan?

Employer contribution requirement: Employers must make either a safe harbor matching contribution or a safe harbor non‐elective contribution.

  • A matching contribution must equal at least 4% of compensation by using either: the basic formula or enhanced formula.
    Basic formula 100% of the first 3% of compensation plus 50% of the next 2% of compensation Or Enhanced formula 100% of the first 4% of compensation Elective contributions more than 6% cannot be matched. This does not mean that the match amount cannot exceed 6% of compensation only that deferrals more than 6% cannot be matched. So, a safe harbor matching contribution equal to 200% of 5% is allowed.
  • A non‐elective contribution (profit sharing contribution) that equals at least 3% of the employee’s eligible compensation for the plan year. A contribution greater than 3% is allowed.

Vesting Requirement: Safe harbor contributions must be 100% vested.

Notice Requirement: Each participant must receive a written notice describing the safe harbor options the employer will use for the plan year 30 days in advance and annually thereafter. According to the SECURE Act, no need for safe harbor notices for non‐elective plans including QACA non‐elective plans.

Adoption Requirement: The Internal Revenue Service (IRS) requires the first plan year of a newly established safe harbor 401(k) plan (other than a successor plan) to be at least 3 months long.

Exception: Employer Created Within Last 3 Months of the Year
The initial year of a safe harbor 401(k) plan can be shorter than 3 months in the case of a newly established employer if the business establishes the plan as soon as administratively feasible after the employer comes into existence. For example, New Biz is incorporated on November 1, 2019. New Biz can establish a safe harbor 401(k) plan that operates for the last 2 months of 2019.

An employer with an existing non‐safe harbor plan must make the election to adopt a safe harbor plan design before December 1st in the year preceding the safe harbor plan year. Safe harbor provisions must be in effect for 12 months (effective January 1st).

Exception: The SECURE Act permits employers to add a safe harbor feature to their existing 401(k) plans once the year has started if they contribute at least 4 percent of employees’ pay instead of the regular 3 percent. This flexibility will help employers to correct failed ADP/ACP or top‐heavy tests by shifting to a safe harbor plan and making a 4 percent nonelective contribution to participants.

Distribution Restrictions: Safe harbor contributions cannot be distributed before an employee terminates employment or reaches age 59 ½.


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