What is a Safe Harbor Plan?

A safe harbor 401(k) plan is crafted to guarantee that every eligible participant receives an employer contribution, thereby benefiting both employees and employers. Through providing a predetermined employer contribution, employers can sidestep crucial 401(k) nondiscrimination tests, which the IRS utilizes to verify the fairness and equity of the plan for all staff members.

What are the requirements?

Any 401(k) plan has the potential to incorporate a safe harbor contribution. When contemplating the implementation of a safe harbor plan design, it's important for employers to recognize that the employer contribution is a fixed and obligatory component. Typically, this employer contribution must be fully vested immediately. Additionally, there are limitations on amending a safe harbor plan mid-plan year, which will be discussed further below.

For newly established 401(k) plans, timing constraints will determine the type of safe harbor plan design available during the initial (or inaugural) plan year. If your current 401(k) plan does not include safe harbor provisions, you might need to wait until the following calendar year to introduce such provisions.

What are the Contribution Limits?

The standard employee deferral limits for safe harbor 401(k) plans mirror those of traditional 401(k) plans. For the year 2024, these contribution thresholds stand at $23,000 ($30,500 for individuals aged 50 and above). Additionally, safe harbor provisions offer owners and highly compensated employees (HCEs) the opportunity to maximize their deferrals without the concern of nondiscrimination failure.

When should your Company Consider a Safe Harbor Plan?

Safe harbor plans offer advantages to both employers and employees, as we will outline in the following section. However, there are specific circumstances when safe harbor plans prove even more beneficial:

  1. If your company's 401(k) plan has recently encountered failures in nondiscrimination or compliance tests and you seek a stronger assurance of passing future tests.

  2. When your company's Highly Compensated Employees (HCEs) desire to increase their contributions to the 401(k) plan without risking failure in nondiscrimination testing.

  3. If your current plan exhibits a "top-heavy" structure, with 60% or more of plan assets allocated to key employees.

  4. When your existing 401(k) plan experiences low engagement among non-Highly Compensated Employees (non-HCEs) due to factors such as personal financial insecurities or limited contribution capabilities.

  5. In situations where you've recently been mandated to make employer contributions to ensure the plan's continued compliance or passing status.