Safe Harbor 401(k): The Complete Guide [Infographic]

So, you have decided to set up a retirement plan for you and your employees. There are many different options to choose from. But someone recommended a safe harbor 401k for you. In this post, we will look at all the safe harbor 401k rules and deadlines.

Safe harbor 401k plans are one of the most popular 401k retirement plans for businesses that have employees. Safe harbor plans allow business owners to maximize contributions to their own account while minimizing many of the IRS rules. Specifically, they reduce many of the limitations and IRS non-discrimination testing.

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What is a Safe Harbor 401k?

A Safe Harbor 401k plan is a special type of retirement plan that is flexible, cost effective and extremely popular. Like a traditional 401k, it offers flexible and fully tax-deductible employer contributions together with tax-sheltered growth of plan assets.

To be considered a safe harbor plan, employers must satisfy certain contribution, notice deadlines and vesting rules. For example, let’s assume you have 10 employees, but only 4 decide to contribute to the plan. There’s a formula that limits the amount the owner can personally contribute to a basic (or traditional) plan. But with a Safe Harbor 401k, as long as you make the minimum contribution for your employees, you can maximize your own personal contributions.

In addition, the business can take a tax deduction for all matching contributions made to employees. Safe harbor plans can also increase employee retention and provide an incentive for prospective new hires.

Specifically, safe harbor plans allow business owners to:

  • Contribute the maximum annual employee deferral of $23,000 to their own account. If you are over the age of 50 then you are allowed a $30,500 catch up contribution.
  • Receive additional retirement savings from the company’s matching contributions. This is because owners are considered employees as well.
  • Avoid the cost and compliance restrictions association with IRS non-discrimination testing.

Understanding the Requirements

So let’s get into the details. A safe harbor 401k is a specific plan structure that automatically passes the non-discrimination test or avoids it altogether. It’s easy to do, but it will require the employer to make contributions for certain employees. Traditional 401k plans can have a long vesting period for employer contributions.

safe harbor match

However, for safe harbor plans, contributions are required to be fully vested when made. Plans can be designed to restrict matching contributions to only employees who participate in the plan or they can make contributions for everyone, including those employees who are eligible but do not participate.

The matching contributions are usually a small price to pay to ensure you’re your plan passes IRS testing. A safe harbor provision can be added to any type of 401k plan. But it will require a written notification to employees along with a little education. Notification must be received within 30 to 90 days of the start of employment. Once the plan is set up, it should not be that challenging to stay in compliance. 

But there are certain changes that are not permissible during the year. Make sure that you talk to your administrator if you are contemplating a plan amendment. A safe harbor 401k plan will generally satisfy non-discrimination rules for both elective deferrals as well as employer matching contributions. These accounts are 100% vested and must be funded on a per-pay-period basis.

Safe Harbor 401k Rules

So why would someone select a safe harbor 401k plan over a traditional 401k? It comes down to the testing requirements. As a general rule, the government wants to make sure that 401k plans don’t just favor highly compensated employees (HCEs) over non-highly compensated employees (NHCEs).

safe harbor rules

The government has set forth certain compliance tests to make sure that all employees are fairly represented in the plan. A safe harbor plan allows you to automatically pass these non-discrimination testing rules by making certain contributions to participating employees.

  1. Under a safe harbor plan, employers can select between two contribution options: The employer can match 100% of the employees first 3% contribution, plus 50% of the subsequent 2%.
  2. The employer can match 100% of the first 4% of employee contributions.
  3. The employer can contribute 3% of compensation to all employees that are eligible.

Making contributions to your employees’ 401k is the most notable Safe Harbor requirement, but there are additional rules surrounding when and how you offer your plan.

The implementation of a 401k plan provides the opportunity for retirement savings by the employees themselves which is tax deferred. The employer has the option of depositing matching or profit sharing contributions.

Many 401k plans provide for employer matching contributions to encourage and reward elective deferrals by employees and to maximize employee appreciation of the plan.

The current tax savings due to 401k salary deferrals can be a powerful incentive.

Deadlines and Notice Requirements

Safe harbor plans have many deadlines that must be followed. They are required to be set up three months prior to the end of the plan year. For a calendar year plan, that deadline is October 1st. It can generally take 2 to 3 weeks to set up the plan. Plan set up deadlines are contingent upon the type of plan and whether it is a new plan or simply an amendment to an existing plan.


But before you jump in and set one up, you should understand what a safe harbor 401k is, and contemplate all the pros and cons. Most traditional 401k plans are subject to annual non-discrimination testing.

Essentially, the IRS wants to know if a highly compensated employee or the business owner is maxing out 401k contributions annually, while the remaining employees are not benefiting from the plan. The IRS wants to see that all eligible employees are benefiting from the plan, not just the ones in the high paying positions. So the IRS requires testing to make sure that the plan is in compliance.

Here are a few critical dates to remember:

  • November 30th. This is the deadline for requesting a Safe Harbor provision to your existing 401k plan for the following year.
  • December 2nd. A 30 day notice must be sent to all employees.
  • January 1st. A safe harbor provision will take effect and exempt the plan from non-discrimination testing.

Notice Requirements?

Safe harbor plans have employee notice requirements. Every eligible employee must be notified about their rights under the plan annually. The notice must be given within a reasonable time frame. This is at least 30 days, but no more than 90 days before the beginning of the plan year.

Since the set up deadline is October 1st, make sure you don’t wait until a few days before the deadline to set up the plan. This is because you are required to notify employees 30 days before the plan starts, and it may take at least a week to set up the plan. Make sure you discuss a new plan with your administrator well before the deadline.

If you are looking to add a safe harbor provision to a current plan, your administrator can prepare a plan amendment that can go into effect January 1st of any year. But don’t forget the 30 day notice requirement.

If you already have a safe harbor plan but want to make changes, there are specific rules and regulations that must be followed. Luckily, the specifics for mid-year changes are referenced in IRS Notice 2016-16. The notice outlines that employees must receive an updated safe harbor notice that details any plan changes. Notice of the change should be given 30 to 90 days before any change is allowed to go into effect.

  • Each notified employee should have at least 30 days to change any cash or employee deferral election.
  • A combined notice may be provided to employees.

Once the notice rules have been satisfied, you can make changes to certain plan specifics. For example, this could include increasing future safe harbor contributions (say from 3% to 4%) or possibly changing plan entrance date for eligible employees from quarterly to monthly.

Safe Harbor 401k Testing

401k plans generally have three main types of compliance tests. These tests are typically required to be performed on plan to ensure that employees are treated fairly:

  • Actual Deferral Percentage (ADP) test. This test compares the deferral percentage of HCEs and NHCEs. As a general rule, the HCE deferral amount should not be more than two percentage points higher than the non-HCEs’ average.
  • Actual Contribution Percentage (ACP) test. This test compares the employer matching contributions between both the HCEs and NHCEs.
  • Top-Heavy test. This test examines whether the account balances of key employees is greater than 60% of total plan assets.

So what is a highly compensated employee (HCE)? Highly compensated employees are typically defined as individual(s) with more than 5% ownership, the family members of a more than 5% owner (this includes spouse, parents, children and grandparents), or employees who make more than $125,000 in the prior calendar year.


So if you do not have a safe harbor plan, the owner and any other HCEs will be able to defer only about 2% more than the average of the eligible Non-Highly Compensated Employees (NHCEs). Should the plan have no eligible NHCEs participants, then none of the HCEs would be able to participate.

Safe Harbor 401k Match

So in order to avoid non-discrimination testing, the business owner must contribute to the employees’ accounts. Accordingly, business owners with a safe harbor 401k must either:

  • Make the dollar-for-dollar matching contribution (for all participating employees) on the first 4% of the employee’s compensation, or
  • Contribute 3% of each eligible employee’s compensation regardless of whether or not the employee chooses to participate in the plan.

Business owners must make sure that they have consistent revenue to make matching contributions. Businesses who find it difficult to fund matching contributions might find that a 401k plan without a safe harbor provision might be a better fit.

Advantages & Disadvantages

There are many advantages to safe harbor 401ks. They are a good choice for companies that do any of the following:

  • Were already planning to match employee contributions.
  • Are concerned about passing non-discrimination testing
  • Fail the ACP, ADP, or Top-Heavy testing
  • Have a relatively low participation among NHCEs and non-key employees

When it comes to cons, the biggest disadvantage to a safe harbor 401k is the matching contributions the company will make. As a result, it’s certainly possible overall payroll could go up by 3% or more if all employees participate.

But most companies realize that the upside of the plans far outweighs the downsides. Offering a safe harbor 401k should result in happier employees, tax deductions, and the ability to make a full employee deferral into the plan for yourself.

Safe Harbor 401k Third Party Administrator (TPA)

Many business owners who establish a safe harbor 401k can choose from many different third party administrators (TPAs). But what does a TPA actually do and why do you need one? Selecting the right safe harbor 401k TPA can be tougher than you may think.

A safe harbor 401k TPA is a company that is hired by the business to run many of the operational tasks associated with the plan. These responsibilities often include:

  • Drafting and designing any plan documents;
  • Updating and amending the plan (as necessary);
  • Administering loan documents;
  • Processing 401k distributions and rollovers;
  • Completing any required non-discrimination testing (if necessary);
  • Calculating the business contributions along with forfeitures;
  • Determining and tracking employee vesting percentages;
  • Completing the annual reporting requirements, including filing Form 5500; and
  • Maintaining operational compliance with the Department of Labor and IRS.

In addition to the compliance and administrative tasks, a good TPA will assist clients in determining the proper plan design and help them maximize the plan attributes. The TPA will review plan design and provide the company personal attention.

At the end of the day, a quality TPA is a problem solver. A high level of expertise is critical to running the plan effectively. Ultimately, it should result in big savings for the business owner and eligible employees.

 401k plan

Whether you have a safe harbor 401k plan or another retirement structure, the TPA is a critical factor to plan success. Make sure you work with a TPA that has requisite experience for any plan you select.

Setting up a Safe Harbor 401k Plan

But the question still remains – how do you start a safe harbor 401k plan?

Here are the five steps to setting up a 401k:

  • Make sure that a safe harbor 401k is the right plan for you.
  • Decide who will set up your plan
  • Choose who will administer the plan (including recordkeeping)
  • Fund the plan
  • Provide plan information to participants.

Step #1 – Determine the right plan

There are several different types of 401k plans.  They include: (1) traditional 401k plans; (2) safe harbor 401k plans; (3) SIMPLE 401k plans; and (4) solo 401k plans. Each plan has a different set of rules and requirements.  In addition, there are pros and cons to different plans.

When your business is a start-up or in modest growth mode the Safe Harbor 401k should work just fine. However, as your company profits grow and you are considering substantial retirement contributions, you can consider a defined benefit plan

Factors affecting plan complexity include the basic plan design, the number of investment options offered to employees, and optional provisions such as loan and hardship withdrawal provisions.

Step #2 – Adopt the plan

Once you have decided the plan that makes most sense for you you will need to design a written plan document. This will serve as the basis for the plan rules and govern how the plan is administered.

Part of adopting the plan will be deciding various plan provisions like (but not limited to): (1) including a Roth; (2) allowing rollovers; (3) providing a loan provision.

You will need to hire someone to establish the plan. This will typically be a retirement plan provider, financial institution, or third party administrator (“TPA”).

Step #3 – Fund the plan

Plan funding may sound easy. But you need to determine how you are going to invest the money.  Are you establishing a traditional brokerage account?  Are you going to put the money in the bank?  Are you going to self-direct the funds and buy alternative assets like real estate, notes, etc?

But you will need to consider if you are making pre-tax or Roth contributions.  In addition, you may be making an employer contribution under a profit sharing plan.  Each scenario has different reporting and are reflected differently when it comes to tax time.

Step #4 – Plan administration

Once you have decided the plan that makes most sense for you, you will need to design a written plan document. This will serve as the basis for the plan rules and govern how the plan is administered.

Part of adopting the plan will be deciding various plan provisions like (but not limited to): (1) including a Roth; (2) allowing rollovers; (3) providing a loan provision.

safe harbor plans

You will need to hire someone to establish the plan. This will typically be a retirement plan provider, financial institution, or third party administrator (“TPA”).

Plan administration can be very complex for traditional 401k plans.  But minimal for solo 401ks. This is where a TPA can help.  Your TPA will typically provide the necessary administrative and compliance tasks.  This includes the record keeping and filing required tax returns.

Step #5 – Provide information to employees

Once your 401k is established, you are required to make certain employee communications. You must notify eligible employees of the plan benefits and requirements. A summary plan description (“SPD”) is the main vehicle that informs participants and their beneficiaries about the plan and how it works. Accordingly, the SPD will be provided to you by the entity who establishes the plan on your behalf.

Final thoughts

Starting a 401k should not be that difficult.  Most of the process can be accomplished by hiring an experienced TPA that can work with you to design, establish, and administer the plan. Follow the five steps above and you will be well on your way.

Your plan will run smoothly and efficiently if it receives the careful and consistent attention of experienced plan administrators, with advanced computer support systems, working closely with your office staff.

401k plans are popular retirement vehicles for both large and small companies and your CPA can help.. They offer flexibility and important tax benefits. They give employees the choice to receive cash income or to defer income to a tax sheltered retirement plan on a before tax basis.

The plans do require modest matching contributions. But they offer a tremendously attractive and popular benefit for employees.

Paul Sundin

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