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Safe Harbor Plans Explained

The goal of 401(k) plans is to prepare employees for retirement, and the government wants to make sure that everyone — not just highly compensated employees — gets to participate in a meaningful way. To satisfy this condition, the IRS requires that plans pass certain nondiscrimination tests each plan year. If a plan were to fail one of these tests, it could mean adding administrative work, making expensive corrections, and potentially even refunding 401(k) contributions. Fortunately, there is an option for plan sponsors: a safe harbor feature that automatically satisfies most nondiscrimination testing. It has certain built-in elements that are intended to help employees save by requiring companies to contribute to their employees’ 401(k) accounts. When employers take this step to encourage more employees to participate, the IRS offers them “safe harbor” from both the nondiscrimination testing process and the consequences of failure.

Safe Harbor Plan Accounts

Safe harbor plans require that you contribute to your employees’ retirement 401(k) accounts in one of two forms: a match or a nonelective contribution.

  • Safe Harbor Match – With this option, the company makes a matching contribution only to those employees who make salary deferral contributions. There are two safe harbor matching contribution formulas:
    • Basic: The company matches 100% of all employee contributions, up to 3% of compensation, plus 50% of the next 2%.
    • Enhanced: The company matches 100% of all employee contributions, up to 4% of compensation.
  • Safe Harbor Nonelective – With this option, the company contributes at least 3% of each employee’s compensation, regardless of whether the employees make contributions.

Unlike company discretionary match or profit-sharing contributions, safe harbor contributions must be 100% vested immediately. Safe harbor contributions must also be provided to all employees, regardless of number of hours worked during the plan year or employment status on the last day of the plan year.

For new plans, October 1st is the final deadline for setting up the safe harbor feature. However, companies shouldn’t wait until a few days before the deadline to set up the plan because if there is a matching contribution, employees must be notified 30 days before the plan starts, and it can take a week or more to set up the plan. For existing plans, the deadlines depend on the type of safe harbor contribution being added to the plan.

Nondiscrimination Tests

Once all of the safe harbor requirements have been satisfied for a plan year, the following nondiscrimination tests can be avoided:

  • Actual Deferral Percentage (ADP) – compares the elective deferrals (pre-tax and Roth) of HCEs and NHCEs.
  • Actual Contribution Percentage (ACP) – compares the matching and after-tax contributions of HCEs and NHCEs.
  • Top-Heavy – compares the total account balances of key employees and non-key employees.

In terms of pros and cons, the biggest downside to offering a safe harbor plan is the cost of the contributions a company will make. It’s possible they could increase a company’s overall payroll by 3% or more if all employees participate.

However, many companies think the upside more than outweighs the cost. Offering a safe harbor plan can result in happier employees, tax savings, and greater certainty that the plan won’t fail nondiscrimination tests.

If you have questions about the information outlined above, our seasoned and experienced employee benefit plan professionals are here to help. You can learn more about our Employee Benefit Plan services by visiting our website and don’t hesitate to contact Dan Sturm, Partner & Director of ERISA Services at

About the Author

Steph Kramer

Steph joined McKonly & Asbury in 2016 and is currently a Manager in the firm’s Audit & Assurance Segment. Steph audits a broad spectrum of employee benefit plans, including 401(k), 403(b), retirement, profit sharing, health and… Read more

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