Safe Harbor 401(k) Plans Explained


By The Human Interest Team

At Human Interest, we support all different kinds of retirement plans for small businesses. But one plan we recommend quite often is the safe harbor 401(k) because it’s a great way for employers to reward employees and simultaneously save themselves tons of administrative hassle. So, what’s so special about a safe harbor plan?

What is a safe harbor 401(k) plan?

A safe harbor 401(k) plan is a type of tax-deductible 401(k) plan that ensures all employees at a company have some set of minimum contributions made to their individual 401(k) plans, regardless of their title, compensation, or length of service. Employers make annual contributions on behalf of their employees without a vesting period.

There are three different “types” of safe harbor 401(k) plans, all requiring some type of employer contribution.

A major perk of this particular plan is that it also helps companies pass 401(k) non-discrimination testing — one of the checks that the IRS puts on 401(k) plans to make sure they’re equitable to all employees. Ultimately, it’s a nice thing to do to help employees save more money in their retirement funds. It also reduces the administrative overhead of performing multiple annual tests.

For additional information on setting up the right 401(k) plan for your company visit the Plan Design resources in our Learning Center.

Requirements of a safe harbor match

Anyone who currently has a 401(k) plan can offer a safe harbor match, or an employer matching contribution plan. If you are about to, or are in the middle of, signing up for a new 401(k) plan, you should ask about safe harbor in advance. Most 401(k) providers (including Human Interest) have it as an option, as it’s generally recommended for most small companies.

If you currently have a 401(k) plan that is not safe harbor, you will have to wait until the next calendar year to be able to launch a safe harbor plan (we will discuss the deadlines for this further below).

Here are the minimum requirements. You must meet ONE of the following for your plan to be considered a legal safe harbor plan:

  • Elective (enhanced match): Company matches 100% of all employee 401(k) contributions, up to 4% of their compensation, OR

  • Elective (basic match): Company matches 100% of all employee 401(k) contributions up to 3% of their compensation, plus a 50% match of the next 2% of their compensation, OR

  • Non-elective: Company contributes 3% of each employee’s compensation, regardless of whether the employee also makes contributions.

For companies that want to go above and beyond for their employees, they can offer a higher percentage match and still qualify for safe harbor. However, most of our clients and most safe harbor 401(k) plans, in general, typically just offer the simple 4% match (option 1). The first two elective options are probably better suited for you if you want to actively encourage your employees to contribute by motivating them with the matching employer contribution. Non-elective essentially means the employee could contribute $0 and still receive the employer contribution.

Unlike other types of matching, in which employers can choose a certain vesting schedule, safe harbor matches must be immediately vested for all employees. That means employees immediately own 100% of the employer contribution without progressive periods of ownership or delays.

Because safe harbor contributions must be made annually, companies are implicitly required to have strong cash flow in order to meet their commitments. Actively managing your company’s safe harbor 401(k) plan can help ensure your company can make the contributions in full and on time.

Safe harbor deadlines

Oct. 1 is the deadline to launch a new safe harbor 401(k) plan for the current calendar year. For the first year of a new safe harbor plan, the safe harbor plan must be in effect for a minimum of 3 months, which is why Oct. 1 is the deadline to launch.

Nov. 1 (or as early as possible in the month): There is a Dec. 1 deadline for employee notices (more on that below!) that determines two November deadlines:

  • If you have an existing safe harbor plan and would like to change the type of safe harbor (example: safe harbor enhanced match → safe harbor non-elective), this must be decided prior to Dec. 1 so that the notices can be distributed by Dec. 1 (which is the same 30-day deadline as above).

  • If you have an existing 401(k) plan that’s not safe harbor: To amend your IRS plan documents to enact a safe harbor 401(k) plan for the following calendar year, you must let your provider know prior to Dec. 1.

Dec. 1 is the date by which all safe harbor plans, both new and old, must have distributed a notice to their employees (at Human Interest, we take care of this for our clients). The rule is at least 30 days before the first day of the year, so for a plan that will be safe harbor in 2022, December 1, 2021 is that date.

Jan. 1 is the date on which existing 401(k) plans can begin anew as safe harbor 401(k) plans. Unfortunately, if you have an existing, regular 401(k) plan, you cannot add safe harbor provisions to it in the middle of the year. If you follow the deadlines above, you can take steps to have it launched for the following year.

A new 401(k) plan, whether it’s safe harbor or not, can be established at any point in the year.

Working backward from all these deadlines, we recommend letting your 401(k) provider know by mid-October to either amend your current plan documents (existing 401(k)s) or to include it in your new plan documents (new 401(k)s) so that they can get your plan set up, launched, and have all the notices sent by Dec. 1. Once that’s established, you’ll be able to officially offer safe harbor starting Jan. 1 of the following year.

When should your company consider a safe harbor plan?

Safe harbor plans are very beneficial for both employers and employees, as we will describe in the next section. But there are certain circumstances when safe harbor plans are even more advantageous as tools to protect your company. These circumstances include the following:

  • If your company’s 401(k) plan has recently failed non-discrimination or compliance tests and you want a stronger guarantee of performance in the future.

  • Your company’s HCEs want to be able to contribute more to the 401(k) plan without risking non-discrimination testing failure.

  • Your current plan is “top-heavy,” or has 60% of more of the plan assets allocated to key employees.

  • Your current 401(k) plan has a low level of engagement among your non-HCEs due to lack of engagement, personal financial insecurity, or inability to contribute.

  • You have recently been required to make employer contributions to keep your plan passing or compliant.

Safe harbor plans are particularly valuable for small and medium-sized businesses, especially if your key employees want to actively contribute to the company 401(k) plan. Here’s why:

  1. For companies with ten employees or fewer: Having two key employees who want to contribute heavily to their 401(k) can make your company’s plan top-heavy. Changing it to a safe harbor plan allows these key employees to make their preferred level of contributions and keep your company compliant.

  2. For companies with 50-80 employees: Even at companies with dozens of employees, non-HCEs may not be contributing enough for HCEs to max out their 401(k) contributions. However, a safe harbor plan gives them the freedom to contribute more fully without jeopardizing the standing of the company’s plan. This can help incentivize key HCEs to continue their employment with your company instead of looking for more flexible benefit offers elsewhere.

Benefits of having a safe harbor 401(k) plan

Remember that the government really wants to encourage and incentivize 401(k) plans by offering lots of tax benefits to both employers and employees; however, it also wants to make sure that employers are not taking advantage of these great tax benefits while excluding employees. This is why the IRS administers 401(k) non-discrimination testing. A safe harbor plan was designed to help make it easier to pass NDT.

  • Automatically pass non-discrimination testing.

  • Automatically satisfy top-heavy testing.

  • Allow all employees to contribute the maximum allowable amounts to their 401(k).

  • The company will not have to restrict employee contributions from HCE (highly compensated employees) and company owners or monitor contributions from NHCE (non-highly compensated employees).

  • Provide a tremendous incentive for employees to save for their future. Matches in general will increase your employee participation rate significantly and will also give you an advantage in recruiting and retaining employees, especially if you’re competing with larger companies for talent.

  • The match is tax-deductible for the company. For employees, it’s essentially a tax-free bonus, as well.

Disadvantages of a safe harbor 401(k) plan

  • Under the safe harbor match, you need to commit to the plan for one year. Also, notices have to be distributed every year, at least 30 days before the new year begins on Jan. 1.

  • There are specific annual deadlines and requirements. So if you decide to offer safe harbor, it may take a few months to take effect.

  • There is a termination fee charged by some 401(k) providers if you ever change your mind and decide to stop offering safe harbor.

  • It can be relatively expensive, depending on the salaries of your employees.

Essentially, a safe harbor plan’s main benefit is convenience — it offers less testing hassle and more flexibility in contributions. However, the downside is that it’s not free and comes at a slight cost in terms of administrative work, as well.

How much does a safe harbor 401(k) plan cost?

The more employees you have, and the higher their salaries are, the more expensive a safe harbor 401(k) will be for your company.

If you offer a non-elective safe harbor plan, it will be easier to calculate the total budget for the plan because it is that percent of your total payroll. So, for instance, companies offering a 3% non-elective contribution, with 10 employees each earning $60,000 each, would contribute $60,000 x 10 x 3% = $18,000 total.

For the safe harbor match, the total cost will depend upon employee contributions, so it is more difficult to predict, but it is typically cheaper overall (in terms of employer cost) than a non-elective safe harbor.

Use our safe harbor calculator to get a better idea of how much a plan will cost your business. If you’re looking for a great 401(k) for your employees, click here to request more information about Human Interest.

We believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment advising, and integration with leading payroll providers.

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The content in this blog post has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Human Interest's investment advisory services are provided by Human Interest Advisors, LLC, an SEC-Registered Investment Adviser. Investing involves risk and may result in loss. Past performance is no guarantee of future results, and expected returns may not reflect actual future performance.