Many employees have access to a company sponsored retirement plan, such as a 401(k). One of the most common 401(k) plan types is the Safe Harbor 401(k).
What is a Safe Harbor 401(k)? With this retirement plan, eligible participants will receive an additional employer contribution to their 401(k) if they participate in the fixed employer contribution on an annual basis. This offering enhances a participant’s retirement savings, allowing them to save more money on an annual basis.
To learn more about how a Safe Harbor plan works, the benefits of participating, and the contribution limits, read below.
How Safe Harbor 401(k) Plans Work
Companies that sponsor traditional 401(k) plans undergo extensive nondiscrimination tests each year to ensure that the traditional 401(k) plan structure doesn’t benefit highly compensated employees more than others. These employees often own more than 60% of the 401(k) plan assets and are referred to as “key employees.” A company can forgo the annual testing if a Safe Harbor Match plan is offered to all employees, creating a fairer way for employees to benefit from the 401(k) plan and save for retirement.
An employer who provides a Safe Harbor 401k to employees can choose between three different contribution types to satisfy the provisions of the plan and 401(k) documentation, including:
- Basic Safe Harbor Match: All eligible employees who contribute to the company’s traditional 401(k) plan can benefit from this Safe Harbor match option. A company will match 100% of contributions up to 3% of the employee’s annual compensation, plus 50% on the next 2%.
- Enhanced Safe Harbor Match: Again, employees are eligible if they participate in the company’s traditional 401(k) plan. With the Enhanced Safe Harbor match, an employer will match 100% of contributions up to 4% of an employee’s annual compensation but cannot exceed 6% total.
- Nonelective Safe Harbor Match: With this Safe Harbor 401(k) plan, all employees are eligible to participate, including employees not participating in the company’s traditional 401(k) plan. Here, an employer will match at least 3% of an employee’s annual compensation.
In addition, Safe Harbor 401(k) plans vest immediately, meaning that all contributions by an employer are 100% owned by the employee upon deposit. That means that even if your traditional 401(k) doesn’t vest for two or three years, your Safe Harbor plan contributions will, giving you greater flexibility.
Safe Harbor 401(k) Plan Benefits for Employees
An employer getting a nondiscrimination pass from the Internal Revenue Service (IRS) isn’t the only benefit of a Safe Harbor 401(k) plan. In fact, there are multiple benefits that are offered to employees through a Safe Harbor, such as:
- Allowing all employees to contribute the maximum allowable amounts to their 401(k) with employer additions that vest immediately.
- Providing tax-deductible contributions from an employer.
- Giving small businesses another option to allow employees to save for retirement.
Overall, the Safe Harbor 401(k) plan offers more flexibility for both the employer and employee and creates a better opportunity for employees to save for retirement.
Safe Harbor 401(k) Contribution Limits
A Safe Harbor 401(k) plan follows a similar contribution structure to the traditional 401(k) plan, meaning that there are limits determined by the IRS each year.
These deferral limits create a maximum amount that participants can save each year, unless you’re over 50 years old and utilizing a catch-up contribution, which has a higher annual maximum.
To learn what the current limits are for both normal and catch-up contributions, visit the IRS’s FAQ page here.
Safe Harbor 401(k) plans are a great way for employees to save more money for retirement and can make a big difference in the percentages contributed on an annual basis. Check with your company’s Human Resources team to learn about the options available to you so you can plan your retirement contributions appropriately.
If your employer does offer a Safe Harbor 401(k) plan, then the employer is required to notify their employees on their Safe Harbor plan rights each year, so check with your employer for additional resources, if needed. Employees of a company that offers a Safe Harbor plan have the opportunity to receive additional funds from your employer – learn more here on the subject from one of our resources.
For business owners who are interested in adopting a Safe Harbor program for your employees, or in changing your existing plan to a Safe Harbor, allow Slavic401k to be of assistance. Visit us here and complete our simple form – a member of our team will get back to you shortly to get things started. You can also visit this resource page on Safe Harbor to learn more about the nature of Safe Harbor retirement plans. We also recommend this resource on extra money with the 401(k) Employer Match.
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