What Is a Safe Harbor 401(k) Plan? (2024)

Trending Videos

What Is a Safe Harbor 401(k)?

A safe harbor 401(k) plan is a simpler version of a 401(k) retirement plan that is exempt from many of the complex tax rules and compliance requirements applicable to traditional 401(k) plans, provided it meets certain criteria.

This type of plan is often used by smaller businesses, as it allows them to avoid the higher cost and burden of Internal Revenue Service (IRS) testing requirements. Safe harbor 401(k)s are one the most popular 401(k) plans used by small businesses today.

Employee Benefits of a Safe Harbor 401(k) Plan

According to the Department of Labor, employees can benefit from safe harbor 401(k) plans in several ways. In exchange for reducing employers' compliance burden, employees in these plans benefit by receiving a mandatory amount of employer contributions. In addition, the most popular safe harbor 401(k) plan requires employers to provide immediate vesting to employees, which means employees own the full amount of employers' contributions as soon as they are made.

Employer Benefits of a Safe Harbor 401(k) Plan

Safe harbor 401(k) plans can provide many benefits for employers, including:

• Eliminating the need to adhere to a vesting schedule, as all employer contributions are fully vested as soon as they are made
• Reducing the complexity, cost and burden of compliance by eliminating the need to undergo annual nondiscrimination testing
• Exempting employers from "top-heavy" testing to evaluate whether key employees own more than 60% of the assets in a retirement plan

Safe Harbor 401(k) Plans and Contribution Formulas

Before the beginning of each calendar year, employees must receive a plan document detailing which plans the employer has chosen. Each type of 401(k) safe harbor plan offers different match and contribution options:

• Basic Safe Harbor (Elective Safe Harbor):Employers who choose this plan match 100% of employee contributions up to 3% of an employee's compensation. For employee contributions between 3% and 5% of pay, there is a 50% match.
• Nonelective Safe Harbor: In this plan, employers contribute equal to 3% of pay to each employee’s account, regardless of whether the employee participates in the plan.
• Enhanced Safe Harbor: Employers match 100% of contributions up to 4% of an employee's compensation in this plan.
  

What is QACA Safe Harbor?

QACA (qualified automatic contribution arrangement) plans feature automatic enrollment that starts at 3% of a worker’s compensation and gradually increases each year an employee participates.

With a QACA plan, employers must make a minimum of either:

• A matching contribution of 100% of an employee's contribution up to 1% of compensation, plus a 50% match for the employee's contributions between 1% and 6% of pay, or
• A nonelective contribution of 3% of compensation for all employees, including those who don't contribute to the plan

How Does a Safe Harbor 401(k) Compare to a Traditional 401(k) Plan?

A safe harbor 401(k) plan is similar to a traditional 401(k) plan, with a few crucial differences, as long as certain criteria are met. It must provide for employer contributions that are fully vested when made. And it is not subject to the complex annual tests that apply to traditional 401(k) plans.

Employers offering these plans must follow additional rules, including an October 1 start date for calendar year plans and specific notice requirements to employees. Employers have the obligation to provide eligible employees with information about the plan within a reasonable amount of time.

The Bottom Line

A safe harbor 401(k) is a type of a 401(k) retirement plan that is often used by small businesses because it is not burdened by many of the compliance rules of other 401(k) plans. This can be more cost-effective when compared to the fees that come with managing a traditional retirement plan.

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy.