Safe Harbor 401(k) Plan Basics

Keeping It Short & Simple

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 $22,500 limit (or $27,000 limit if at least age 50). Without the safe harbor feature, highly-paid individuals are often restricted to deferrals much lower than the maximum amount.

What are the two most common safe harbor options?

  1. 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.)
  2. NONELECTIVE CONTRIBUTION  = Employer con­tri­butes 3% of em­plo­yee’s com­pen­sa­tion (Em­plo­yee does not need to make 401(k) de­fer­rals to receive this con­tri­bu­tion.)
  • Other safe harbor options include an enhanced match that is more generous than the basic match contribution, or a “maybe” non elective contribution that allows the employer to decide later in the year whether they want to use the safe harbor feature or not.
  • Unlike a SIMPLE IRA, additional employer contributions can be made which will allow owners to maximize their annual savings.
  • Unlike a SIMPLE IRA, employee deferrals can be made on a pre-tax basis or after-tax basis as a Roth contribution.
  • Employees are entitled to 100% of safe harbor contributions, but a vesting schedule can be applied to additional employer contributions to reward employees for continued employment with your business.

Maximum Annual Retirement Contributions

Participant Age Employee Deferral Required Employer Contribution Additional Contributions*
Less than 50 $22,500 Safe Harbor Option Up to $66,000
50 or Older $27,000 Safe Harbor Option Up to $73,500

*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.

Go to the Part 8 post in this series