A Safe Harbor 401(k) plan is an employer-sponsored retirement plan that allows companies to make contributions on behalf of their employees without incurring the potential compliance burden that comes with traditional 401(k) plans.
The Internal Revenue Service (IRS) wants as many employees as possible to save up for retirement and requires companies to undergo nondiscrimination tests to ensure that the retirement plan offered is not overly advantageous to highly-compensated employees (HCEs).
The nondiscrimination test limits the contributions of all HCEs to at most 2% over the average contribution of all other participating workers. Companies can choose to offer a Safe Harbor 401(k) to avoid such compliance tests and their respective costs.
A Safe Harbor 401(k) plan alleviates the burden of these tests by requiring companies to make an employer contribution to the plan that is either a fixed percentage or a dollar-for-dollar match of employee contributions, which comes with certain minimum thresholds.
The main requirement is for companies to make certain employer contributions to all eligible participants in the plan, which must vest immediately. If an employee leaves the company, they can keep the employer-contributed funds.
In a Safe Harbor 401(k) plan, there are three types of contribution formulas that employers choose from: basic matching, enhanced matching, and non-elective contributions.
This formula requires employers to match the employee contributions dollar-for-dollar, up to 3% of the employee’s salary. It also allows an additional 50% match on the succeeding 2% of employee compensation.
Employers are able to make 100% matching contributions that can reach up to the first 4% of each employee’s salary deferred contribution.
Employers can also choose to make non-elective contributions of at least 3% of each employee’s salary. Under this formula, employers must contribute based on an employee’s compensation regardless of whether the employee is contributing to the 401(k) or not.
Consider the table below for computation examples for a hypothetical employee earning $150,000 annually:
QACA is a Safe Harbor 401(k) type where employers agree to automatically enroll employees in the plan. It also includes setting yearly contribution increases up to a maximum percentage.
Under a QACA, employees must be provided with safe harbor match or non-elective contributions for qualified participants in the plan.
Employers can make matching contributions equal to 100% of the first 1% of salary deferred by an employee plus 50% of the next 5% of pay deferred. This QACA Match phases out at 6% of salary deferred.
Alternatively, employers can make non-elective contributions equal to a minimum of 3% of compensation. It is given regardless of the amount of the employee's deferred salary.
Companies choosing QACA must also set a minimum default deferral rate of 3% for the first year of the 401(k) plan, which increases by 1% annually until 6%. A maximum deferral rate of 10% is also set for the first year of the plan, with 15% for subsequent years.
Employees may opt out of the automatic enrollment and may also select a different deferral rate if they wish. Lastly, all QACA employer matching contributions must be vested within 2 years.
The employee contribution limits for Safe Harbor plans are the same as traditional 401(k)s. The IRS sets a maximum contribution limit of $22,500 in 2023. Employees aged 50 and older are allowed an additional $7,500 in catch-up contributions.
Additionally, the IRS limits the combined employer and employee contributions to a maximum of $66,000 in 2023. These limits are updated by the IRS yearly. Company owners and HCEs can max out their salary deferrals without fear of nondiscrimination tests.
Aside from the mandatory employer contributions and specific limits, Safe Harbor 401(k) plans must also abide by the following deadlines:
October 1 is the last day of starting a new Safe Harbor 401(k) plan for your employees. Note that this feature must be implemented for the whole year and will be retroactively applied from January 1 of the current year. Your company will be exempt from nondiscrimination tests.
Nonetheless, you must remember that there are preliminary requirements you must meet. August 19 is the deadline for setting up guidelines for your Safe Harbor Plan for the year. A 30-day notice must also be sent to your employees on or before September 1.
If you want to add a Matching Contribution Safe Harbor feature to an existing 401(k) plan, you must make a formal request and prepare the guidelines for your plan by November 18. Such changes will take effect in the following year.
You must send out the required 30-day employee notices on or before December 1. If approved, the new Safe Harbor feature starts on January 1 of the succeeding year. All contributions will be based on employee compensation for that year.
Suppose you want to make 3% non-elective Safe Harbor contributions to an existing 401(k) plan. There are different dates to remember. You must file the request and amend the guidelines by November 5 for it to take effect in the current year.
The 3% non-elective contribution can start by December 1 and apply retroactively from January 1 of the current plan year. You can still make non-elective contributions if you are late in filing amendments, but it must be at least 4%.
For any Safe Harbor plan, companies must inform their employees about the changes.
Specifically, this includes a 30-day written notice of contributions or amendments made to the plan. The notices should also explain any rights and options available to employees under the new or amended plan.
Employees must receive these notices before each contribution is made to ensure that they are fully aware of all Safe Harbor 401(k) features offered by their employer. Notices can be sent via mail or email as long as employees can access the plan contents.
Generally, you must notify your employees about their rights and obligations under a Safe Harbor 401(k) plan for at least 30 days, but not more than 90 days, before it takes effect.
You can also make mid-year changes to an existing non-elective Safe Harbor 401(k) plan. However, you cannot terminate the plan until the end of the year unless your company is no longer in business.
Employees must be notified within 30 to 90 days before any changes are made and must be given the choice to opt-out or reduce their contributions to avoid exceeding the applicable limits set by the IRS.
The main benefit of a Safe Harbor 401(k) plan revolves around the exemption to nondiscrimination tests. It allows all employees to max out the contribution limits set by the IRS regardless of their annual compensation.
It encourages more employees to participate in the 401(k) plan, increasing their retirement savings. Offering Safe Harbor 401(k)s may also attract top talent, as HCEs will not be limited in their contributions.
It is also easier for companies to administer because it does not require them to monitor HCE contributions and balance them with non-HCEs. A company's matching and non-elective contributions may be tax deductible as part of business expenses.
Some small businesses with 100 or fewer employees may also be given tax credits of up to a total of $16,500 in the first 3 years if they start a 401(k) plan. This tax credit is awarded to cover the costs of starting a Safe Harbor or any other 401(k) plan.
The main drawback of a Safe Harbor 401(k) plan is its cost. Companies that choose to adopt this plan must make mandatory matching or non-elective contributions for all eligible employees, which can be expensive.
Once you choose a Safe Harbor feature for your 401(k) plan, you must commit to it for at least a whole year. You are also required to make annual employee notices 30 to 90 days before the start of a new plan year.
The company must pay administrative fees in order to manage the plan and ensure compliance with IRS regulations. It means the company has to spend money on accounting, legal fees, and time spent preparing these documents.
There are also restrictions on when an employer can change from a traditional 401(k) to a Safe Harbor 401(k) and when a company can opt out of making contributions altogether. Usually, 401(k) service providers charge termination fees, which can add to your costs.
A Safe Harbor 401(k) plan is simpler to manage, albeit with potentially higher costs. Your company need not worry about balancing HCE and non-HCE contributions to pass IRS nondiscrimination requirements.
It is especially beneficial if your company has recently failed such compulsory tests. If you want to avoid the risk of failing nondiscriminatory tests and the potential removal of your 401(k) plan, choosing Safe Harbor features is the way to go.
A Safe Harbor 401(k) plan is also suitable for companies with top-heavy 401(k)s, meaning more than 60% of plan assets are allocated to the HCEs and other key employees.
You may also select this plan type if your overall employee 401(k) participation is low. Making non-elective contributions for your employees ensures they save for retirement at no cost to their own funds.
It might boost employee morale and job satisfaction, raising your company's overall performance.
A Safe Harbor 401(k) plan is a tax-advantaged retirement savings plan that allows employers to make larger contributions than traditional 401(k) plans without having to meet IRS nondiscrimination tests.
Employers can make a fixed percentage non-elective contribution or match an employee's contribution dollar-for-dollar up to certain contribution limits set by the IRS.
Since Safe Harbor 401(k) plans are exempted from nondiscrimination tests, they are simpler to manage than other 401(k)s, although with potentially higher costs.
Consider Safe Harbor 401(k)s if your company has recently failed IRS compulsory tests, if your current 401(k) plan is top-heavy, or if you want to increase employee participation without burdening them with salary deferrals.
Finally, consult a retirement planning professional or qualified financial advisor to ensure your company makes the best decisions for its 401(k) plan. Carbon Collective can help you choose the right sustainable 401(k) plan.
A Safe Harbor 401(k) plan is an employer-sponsored retirement plan that allows larger contributions to be made into employees’ accounts without needing to pass nondiscrimination tests. The main benefit of a Safe Harbor 401(k) plan is its flexibility in allowing employers to contribute more than they would be able to under traditional 401(k) plans.
For 2023, the Internal Revenue Service set the contribution limit to $22,500 with a catch-up of $7,500 for employees aged 50 and older. Combined employer and employee contributions must also not exceed $66,000.
Companies and their service providers determine specific eligibility requirements for Safe Harbor 401(k) plan participation. Generally speaking, individuals who are at least 21 years of age and have already completed 1 year of service (with at least 1,000 hours worked) are eligible to join the plan.
The main benefit of a Safe Harbor plan is its exemption from Internal Revenue Service nondiscrimination tests. It provides for simpler management of the 401(k) plan and allows larger contributions for all employees without monitoring highly-compensated employees' contributions relative to other workers.
Unlike traditional 401(k)s, Safe Harbor plans are not subject to nondiscriminatory tests. It requires matching or non-elective contributions to be made instead. It allows for larger contributions without balancing between key employees and average workers.