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 $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?
- 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.)
- 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.