The Basics of the Safe Harbor 401(k)


Many employees have access to a company sponsored retirement plan, such as a 401(k). While some companies offer employer match programs, others may also include a Safe Harbor 401(k).

With this 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 401(k) 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 plan structure doesn’t benefit highly compensated employees more than others. These employees often own more than 60% of the plan assets and are referred to as “key employees.” A company can forgo the annual testing if a Safe Harbor 401(k) plan is offered to all employees, creating a fairer way for employees to benefit from the plan and save for retirement.

An employer who provides a Safe Harbor 401(k) 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 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 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 anything contributed by an employer is 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 contributions will, giving you flexibility to use and distribute the funds as needed.

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, 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 a chance to allow employees to save for retirement, even if the employer cannot afford to sponsor a traditional 401(k) plan.

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 rights each year, along with educational tools, so check with your employer for additional resources if needed. For more information regarding retirement savings and strategy, subscribe to the Slavic401k blog to be the first to know when new content is available.

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