Safe Harbor 401k Plans

• How They Work
• Types
• Applications

Some lower paid employees will not contribute to a 401k plan no matter how generous the incentives. This can limit the contributions made by and to company owners and other highly paid employees. A way around this is to adopt a safe harbor 401k plan. A safe harbor plan lets owners and highly paid employees contribute up to the 401k dollar limits regardless of what other employees contribute to the plan because of a specific design in the employer’s plan contribution.

As an added bonus, safe harbor plans also meet top-heavy requirements. A plan is top heavy when 60% or more of plan assets belong to company owners and their families. For the owner to receive a meaningful benefit under the plan, non-owner employees must receive at least a 3% employer contribution.

There are two types of contributions that can be made to a safe harbor plan; the safe harbor match or the safe harbor non-elective. With both, contributions are 100% vested when made and cannot be withdrawn from the plan for reasons of financial hardship.

Safe Harbor Match

Under the basic safe harbor matching formula, the employer matches 100% of the first 3% of compensation contributed to the plan by an employee and 50% on the next 2% of compensation contributed to the plan. Employees who don’t make 401k contributions don’t receive the match but the employer still receives the safe harbor benefits thereby limiting its out-of-pocket contribution.

Non-Elective Safe Harbor

Here the employer makes a 3% contribution to all eligible employees whether or not they contribute to the plan. Safe harbor non-elective contributions are often part of a larger strategy designed to maximize the benefits received by company owners. By designating a portion of the employer’s normal profit sharing contributions as a safe harbor contribution, the company owner can max out their 401k contribution in addition to receiving a profit sharing contribution.

Prior to adopting a safe harbor plan, the company’s employees must be given notice. For existing 401k plans, notice must be given at least 30 but not more than 90 days prior to the beginning of the plan year when the safe harbor provisions will take effect. Existing profit sharing plans may add a 401k provision (or in the case of a brand new 401k plan) provided there are at least 3 months left in the plan year after notice has been given.