A Safe Harbor 401(k) plan has become an increasingly popular benefit for business owners. That’s because it opens the door for much higher contributions for owners and highly compensated employees (HCEs). These plans allow you to legally bypass the costly compliance testing associated with 401(k) Plans. Further, all employer contributions are tax-deductible at the corporate level.

What is a Safe Harbor Plan?

A Safe Harbor 401(k) plan is a type of retirement plan that allows employers to avoid most annual compliance tests. With a Safe Harbor 401(k) plan, employers and HCEs can save up to the maximum amount each year.

Key Benefits

  • Maximize 401(k) deferrals for owners & HCEs
  • Employer contributions are tax-deductible
  • Pass many major non-discrimination tests
  • Satisfy top-heavy minimum requirements
  • Benefit from small business tax credits
  • Recruitment and retention advantages

When a 401(k) plan includes a safe harbor provision, the employer commits to a minimum level of contribution per eligible employee.  These contributions are immediately vested.  In exchange, the IRS gives you a “pass” on the annual 401(k) compliance testing.

Is A Safe Harbor Plan Right For Your Company?

A Safe Harbor retirement plan may be appropriate for your company if:

  • You or your HCEs aren’t able to contribute the maximum 401(k) deferral
  • Many of your HCEs don’t contribute to the plan, and/or you have low participation among non-HCEs
  • Or non-key employees
  • Your retirement plan fails 401(k) compliance testing
  • You are forced to refund 401(k) deferrals which are taxable
  • You want to help your employees save more for retirement

Two Primary Safe Harbor Requirements:

  1. Employers must make contributions on their employees’ behalf, and
  2. Those contributions are immediately vested.

Safe Harbor 401(k) plans can be an effective way for employers to save the IRS annual maximum amount while eliminating the administrative headaches of annual compliance testing. Additionally, it may improve plan participation and help your employees save more for retirement.

Whether you’re starting a new plan or looking for ways to improve an existing one, it may be worth considering adding a Safe Harbor provision.

How Does A Safe Harbor Plan Work?

Safe Harbor 401(k) plans require employers to

choose one of three possible contribution options:


Employer matches 100% of the participant’s first 3% of deferred compensation and 50% match on the next 2% of compensation deferred.

Example:  If James earns $135,000 and defers 4% of compensation, his match would be:

$40,500 = (3% x $135,000) x 100% + $675 = (1% x $135,000) x 50%

$4,725 = Total

Note: Only employees deferring will receive a match contribution.


Employer matches 100% of the first 4% of each employee’s contribution, not to exceed 6% of compensation deferred.

Example:  If the employer chose a match equal to 100% of deferrals up to 4% of compensation, using the same example above, the match would be:

(4% x $135,000)

$5,400 = Total

Note: Only employees deferring will receive a match contribution.


Employer contributes 3% of compensation, regardless of employees’ 401(k) deferrals.

Example:  Rhonda earns $50,000. She receives a contribution equal to 3% of her compensation.

(3% x $50,000)

$1,500 = Total

Note: Employees receive this contribution even if they aren’t deferring or participating in the 401(k) plan.

For more information, contact us today.