Team Management

Safe Harbor 401(k): Is it Right For You?

Nicolle Willson Certified 401(k) Professional, Certified Financial Planner (CFP®) 
Safe_harbor_401(k)

Getting ready to offer a 401(k) to your employees? Go you! A shiny new retirement savings plan is a win-win for your business; Employees with a 401(k) are more likely to be satisfied with their jobs, and you’ll also gain more tax-deferred savings.

But a word to the wise: Setting up a new 401(k) the right way isn’t exactly a walk in the park. You’ll need to pass some IRS-sponsored tests, and failing them can be costly. That’s where a special kind of plan, called a safe harbor 401(k), can reduce your risk and make things easier for you down the road.

Read on to learn how a safe harbor 401(k) works and how to set one up.

How to set up a 401(k): Passing the IRS nondiscrimination tests

Offering a 401(k) makes it easier for employees to save for retirement. But the government wants to make sure everyone gets to share in the joy of a prosperous retirement, not just highly compensated employees who may benefit from the tax breaks.

So, the IRS has a series of “nondiscrimination” tests that measure whether a 401(k) plan favors highly compensated employees over the rank and file. They’re called the ADP, ACP, and top-heavy tests. If your plan fails one of these tests, it could mean making expensive corrections, heavy administrative work, and potentially even refunding 401(k) contributions. Yikes.

Our 401(k) partner, Guideline, has more details on these nondiscrimination tests if you want to dig into the nitty gritty.

How a safe harbor 401(k) plan helps you ace those IRS tests

A safe harbor 401(k) lets your plan skip right past nondiscrimination testing, thanks to a nifty little quid pro quo:

  • Your company has to agree to make supplementary contributions to all of your employees’ 401(k) accounts.
  • In exchange for being more generous and encouraging more employees to participate, the IRS offers you a “safe harbor” from both the nondiscrimination testing process and the consequences of plan failure.

Does a safe harbor sound like a good way to sail off into the retirement? Here’s what you need to know:

Is a safe harbor 401(k) right for you?

Good question! In general, safe harbor 401(k) plans are a good choice for companies that fit into any of these categories:

  1. You’re planning to match employee contributions anyway
  2. You don’t want to worry about nondiscrimination testing
  3. You’ve consistently failed the ADP, ACP, or top-heavy nondiscrimination tests
  4. You have low participation among rank and file employees
  5. You want to take good care of your employees

For most businesses, the main thing to keep in mind when offering a safe harbor 401(k) is that the contributions your company makes can increase your overall payroll by 3 percent or more. With a safe harbor 401(k) plan, though, you can look forward to tax savings, reassurance that your plan won’t fail, and through retirement savings, steps toward a more prosperous future for everyone in your company.

How to set up your safe harbor 401(k)

The main requirement for a safe harbor 401(k) is that the employer must make contributions to their employees’ 401(k) savings, and those contributions must vest immediately.

There are three main contribution structures you can choose in your safe harbor plan, and here are the minimum contribution options:

  1. Basic Matching: Your company matches 100 percent of each employee’s 401(k) contributions, up to 3 percent of an employee’s compensation, plus a 50 percent match of the next 2 percent of their compensation.
  2. Enhanced Matching: Your company matches at least 100 percent of each employee’s 401(k) contributions, up to 4 percent of their compensation.
  3. Non-elective Contribution: Your company contributes at least 3 percent of each employee’s compensation to their 401(k), regardless of whether employees make contributions themselves.

Important safe harbor deadlines

September 1st is the first deadline for setting up your safe harbor plan; That’s when you need to notify your employees about the new 401(k) to ensure they get a 30-day heads-up. October 1st is the last day your 401(k) plan can go live and thereby forego the nondiscrimination tests for the following year. Pro tip: Give yourself at least a week to set up your plan.

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Key dates for new 401(k) plans

  • By or before August 31: Set up a safe harbor 401(k) Plan
  • By September 1: 30-day notice must be sent to employees
  • October 1: Safe Harbor 401(k) Plan is effective and exempt from nondiscrimination testing for the following year

Key dates for existing 401(k) plans

  • By or before November 30: Request the addition of a safe harbor provision to your 401(k) plan for the following year
  • December 2: 30-day notice must be sent to employees
  • January 1: Safe Harbor provision takes effect and exempts the plan from nondiscrimination testing

With a safe harbor 401(k) plan, you get your retirement savings program up and running quickly and compliantly to help your team save even more for their future.


This post is an excerpt of our 401(k) partner Guideline’s guide to offering a Safe Harbor 401(k).

Updated: November 1, 2019

Nicolle Willson
Nicolle Willson Nicolle Willson is a Certified 401(k) Professional and Certified Financial Planner (CFP®) at Guideline 401(k). She also holds a J.D. from UCLA School of Law.

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