Safe Harbor Plans

For certain small business owners, a Safe Harbor 401(k) can represent a uniquely attractive option. By adding a Safe Harbor provision to a 401(k) plan, an employer can avoid top-heavy rules and non-discrimination tests and still offer the company’s highly compensated employees a chance to max out their retirement contributions.

Businesses that use Safe Harbor 401(k) plans are typically small- to medium-sized companies with solid revenue streams, and represent owners that care deeply for the wellbeing of their employees.

Safe Harbor 401(k)s vs. Traditional 401(k)s

With a traditional 401(k), plan assets have to remain reasonably balanced between high-earning employees and non-high-earning employees. To that end, most 401(k) plans face an annual non-discrimination test to ensure this balance is met. If a traditional 401(k) plan is seen to be more beneficial to business owners and/or employees earning more than $125,000 per year, the IRS can require that retirement funds are returned to the high-earners until the plan is put back in balance.

Safe Harbor plans were designed for businesses to automatically pass the non-discrimination test or avoid it altogether. How? By making contributions to each employee’s plan the same percentage of salary for everyone.

Rules for Safe Harbor 401(k)s

To qualify for a Safe Harbor provision, business owners are required to make mandatory contributions to employee accounts. Plans can allocate contributions in one of three ways:

  1. Basic Match:The employer matches 100% of the first 3% of compensation, plus 50% of the next 2% of compensation.
  2. Enhanced Match: The employer matches 100% on the first 4% of compensation.
  3. Non-Elective Contribution: The employer contributes 3% of compensation to all eligible employees.

Employers can design a plan to limit matching contributions to only those employees who defer compensation, or they can make contributions for everyone, including those who don’t contribute to their own plans. A business can also structure a plan to be age-based so the investors closest to retirement can receive more in employer contributions.

It’s important to be aware that a vesting schedule isn’t allowed with Safe Harbor plans — contributions are fully vested when they’re made. This condition means that the company must give all employees their share, even those who leave or are fired during the year.

Who Might Be Right for a Safe Harbor 401(k) Plan?  

Businesses using Safe Harbor 401(k) plans are often small- to medium-sized companies with strong sales and little need to reinvest profits. Employers who might find a Safe Harbor 401(k) Plan appropriate would include:

  • Entrepreneurs with few employees and high profitability,
  • Businesses where more than half of plan assets belong to highly-compensated employees or owners,
  • Companies with owners and high-earners that make up more than 10%-15% of the workforce, and
  • Small- or medium-sized businesses are nearing a management transition and want to reward high-earners who helped build the company.

Employers who have previously failed non-discrimination testing by the IRS or their plan administrator – or think they may fail in the future – should also consider a Safe Harbor plan. With appropriate notification and education for plan participants, a Safe Harbor provision can be attached to any type of retirement plan or 401(k).


Establishing a Safe Harbor 401(k) plan is nearly identical to any other 401(k). The differences are in matching, disclosures, and other obligations that are outlined in plan documents.

Important dates for new plans:

  • August 23, 2020: Deadline for setting up a Safe Harbor 401(k) Plan for the existing year.
  • September 1, 2020: 30-day notice must be sent to employees.
  • October 1, 2020: Safe Harbor 401(k) Plan is effective and exempt from non-discrimination testing for 2019.

Plan contribution limits:
For the year 2020, basic employee deferral limits for a Safe Harbor plan are the same as any employer-sponsored 401(k): $19,500 per year for participants under 50, and $26,000 when including catch-up contributions for employees over 50.

Bottom Line

Safe Harbor 401(k) plans can offer remarkable advantages for owners and highly-compensated employees to shelter sizeable amounts of income each year. For small business owners, the biggest downside to offering a Safe Harbor plan is the cost of the required contributions — it’s possible they could increase a company’s overall payroll by 3% or more if all employees participate.

But many companies think the upside more than outweighs the cost. Business owners offering a Safe Harbor 401(k) plan will likely see happier employees, tax savings, more retirement savings for everyone, and a certainty that their plan won’t fail testing.