Safe Harbor 401(k) Plan Basics
A safe harbor 401(k) plan is simply a 401(k) plan that includes a safe harbor feature. There are a few options when it comes to the safe harbor feature, but by electing this feature, the employer commits to making minimum contributions to their employees. This is a very popular feature when designing a 401(k) plan because it enhances the plan by:
Allowing all employees, including owners, to maximize their 401(k) deferrals up to the $23,000 limit (or $30,500 limit if at least age 50.) Without the safe harbor feature, oftentimes highly-paid individuals’ deferrals must be returned and taxed due to a failed average deferral percentage test.
What are the two most common safe harbor options?
- BASIC MATCH CONTRIBUTION = Employer contributes $1 for every $1 employee contributes (up to 3% of compensation), PLUS 50 cents for each additional $1 the employee contributes, up to 2% of compensation. (Maximum employer match = 4% of compensation.)
- QUALIFIED AUTOMATIC CONTRIBUTION ARRANGEMENT (QACA) = Employer contributes $1 for every $1 employee contributes (up to 1% of compensation), PLUS 50 cents for each additional $1 the employee contributes, up to 5% of compensation. (Maximum employer match = 3.5% of compensation.)
- NONELECTIVE CONTRIBUTION = Employer contributes 3% of employee’s compensation (Employee does not need to make 401(k) deferrals to receive this contribution.)
* Unlike a SIMPLE IRA or SIMPLE 401(K), additional employer contribution limits are much higher in a 401(k) plan which allows owners to maximize annual savings.
* A vesting schedule can be applied to additional employer contributions made in a 401(k) plan to reward employees for continued employment with your business, unlike SIMPLE contributions that must be vested as soon as they are contributed.
Maximum Annual Retirement Contributions
| Participant | Employee Deferral | Required Employer Contribution | Additional Contributions* |
|---|---|---|---|
| Less than Age 50 | $23,000 | Safe Harbor Option | Up to $69,000 |
| Age 50 or Older | $30,500 | Safe Harbor Option | Up to $76,500 |
*Additional Contribution + Employee Deferral + Safe Harbor Contribution cannot exceed amount shown. Understanding your safe harbor options is important before you choose this type of plan design. It’s always best to have an expert help you weigh the pros and cons based on your particular situation.
