What to Know About Safe Harbor 401(k) Plans

Have you heard of safe harbor 401(k) plans? There are a lot of options and regulations out there regarding various 401(k) plans, so it can be hard to sort through them all. Are safe harbor (401)k plans right for your business? Here is what you need to know about these unique retirement plan options.

What is a safe harbor plan?

Safe harbor 401(k) plans don’t have to fulfill government requirements for government nondiscrimination testing each year. Other 401(k) accounts must be verified that they are benefiting everyone in the company without discrimination. The testing analyzes how much highly compensated employees are investing verses non-highly compensated employees.

If a large discrepancy is found, corrections must be made to level the playing field. However, safe harbor 401(k) plans automatically follow these government requirements. Business owners do not have to be concerned that contributions will be capped based on this testing.

How does a safe harbor plan work?

Under the framework of safe harbor 401(k) plans, all employees can contribute up to $19,500 (in 2021). Anyone aged 50 or older can also make catch-up contributions of up to $6,500 in additional funds.

In return, the company must make contributions to employee 401(k) accounts. These funds become vested right away.

What are the different types of safe harbor 401(k) plans?

There are several types of safe harbor 401(k) plans that businesses can choose from for their employee investments. Following are some of the most common.

  • Basic: A basic safe harbor plan is also referred to as an elective safe harbor. Under this plan, employers will match 100 percent of employee contributions up to 3 percent of their income and 50 percent of contributions above this, up to 5 percent of the employee’s pay.
  • Nonelective safe harbor: If a nonelective safe harbor plan is in place, the employer requires all employees to make a 3 percent retirement contribution. Employees do not have a choice in participation or the amount contributed.
  • Enhanced safe harbor: This type of safe harbor 401(k) plan goes beyond the basic plan. Employers who use this plan match 100 percent of up to 4 percent of employee pay.
  • QACA safe harbor: Qualified Automatic Contribution Arrangement (QACA) plans automatically enroll employees and contribute 3 percent of each employee’s pay to the plan unless the employee opts out of the plan. Each year, the contribution increases by 1 percent until it reaches 6 percent. Employers match 100 percent of the initial 1 percent and 50 percent of the rest.

Why would I want a safe harbor 401(k) plan?

Safe harbor 401(k) plans offer several benefits to employees. First, employee funds are immediately vested. Second, employer contributions are automatic. Third, there are potential tax deductions that can be advantageous to employees. Due to these benefits, these plans can be very attractive to employees and help employers attract and retain staff.

Learn more

Do you have additional questions about safe harbor 401(k) plans? Contact the team at Fiduciary Advisors, Ltd. We’ve been assisting employers and employees with smart financial decisions since 1990. Our experts can help you design and plan the best employee retirement program for your business. Reach us today at 602-864-1012.