What is a Safe Harbor 401(k) and Why Should You Care?

Author Tillie Fabbri

Posted Mar 7, 2023

Reads 6.8K

White and Brown Boats on Dock

Are you looking to start a retirement plan for your business but not sure where to start? If this is the case, then a safe harbor 401k may be the answer. A safe harbor 401k is a type of retirement plan that helps small businessowners accommodate employees without having to worry about passing an Internal Revenue Service (IRS) nondiscrimination test.

A safe harbor 401k is different from other types of 401ks because it automatically passes the IRS's nondiscrimination test each year. This means that employers don't have to worry about making sure their contribution settings comply with certain rules and regulations in order to pass the discrimination test, which makes it easier for them to offer retirement plans to their employees.

Safe harbor 401ks are also beneficial for business owners because they can offer their employees more generous contributions and matching funds than other types of plans. Plus, it allows employers to receive tax breaks from the IRS for offering their workers such a valuable benefit.

Unveiling the Benefits of a Safe Harbor 401(k)

The safe harbor 401k is a popular retirement plan option for business owners and their employees. It offers many benefits over traditional 401k plans, such as increased contributions and lower administrative burdens. Business owners and their highest-paid employees can benefit from the employer contributions that are made to a safe harbor 401k.

YouTube video about Unveiling the Benefits of a Safe Harbor 401(k)

Employees also benefit from this type of retirement plan because they can contribute more towards their retirement funds due to the high-paying jobs they have. This means that the amount of money they receive from the employer’s contribution is higher than it would be with other 401k plans. Additionally, safe harbor 401ks do not face many of the compliance hassles faced by other types of retirement plans since these plans meet IRS rules without having to pass any additional IRS tests.

Finally, another great benefit of safe harbor 401ks is that average contributions are generally higher than those made in traditional 401k plans. This allows both employers and highly paid employees to maximize their retirement savings without dealing with any additional compliance hassles or administrative burdens. Thanks to these benefits, safe harbor 401ks are an attractive option for those looking for a reliable way to save for retirement.


Are Highly Paid Employees Eligible for Safe Harbor 401(k) Plans? It is possible for highly paid employees to be eligible for a safe harbor 401(k) plan. This type of plan allows employers to offer certain benefits to their employees without having to comply with the usual IRS non-discrimination requirements. To qualify, an employer must make a “good faith” contribution for each employee in the plan during the year prior. If these contributions are made, then highly paid employees may reap the benefits of this type of retirement savings option.

Unveiling the Benefits and Drawbacks of a Safe Harbor 401(k)

White and Brown Boats on Dock

"Let's run through the benefits and drawbacks of a Safe Harbor 401(k). Quickly let's start with the good stuff: with a Safe Harbor 401(k), contributions are made on a pre-tax basis, allowing employers to maximize their savings more quickly. Additionally, employees can take advantage of greater contribution limits compared to other retirement accounts. Now let's look at some of the potential drawbacks— administrative costs to set up and maintain a Safe Harbor 401(k) plan can be quite high."


One of the great benefits of a safe harbor 401k plan is that it allows employers to boost participation in their retirement plan and put money back into the pockets of employees. Weve mentioned how safe harbor 401ks are compliant with the IRSs nondiscrimination testing, but there's one bonus perk for employers who offer this type of plan: enhanced matching contributions for non-highly compensated employees (HCEs). Employers who use a safe harbor plan can sweeten their 401k contributions by offering an employer match, which gives employees more incentive to contribute towards their retirement savings. Plus, having a safe harbor plan can also help employers avoid penalties from the IRS for slapping them with excessive contribution or discriminatory plans.

Setting Up a Secure Safe Harbor 401(k)

Sleeping Man and Baby in Close-up Photography

As a small business owner, one of the best ways to set up a secure Safe Harbor 401(k) is to search online for resources and advice from fellow business owners and financial professionals. They can suggest retirement plan providers who can create a custom retirement plan tailored to your specific needs. By consulting with experienced professionals, you can rest assured that your Safe Harbor 401(k) will be up and running securely in no time.

1. Note

The 401k retirement plan is an integral part of the American dream, but it can be difficult to navigate on your own. Fortunately, with a safe harbor 401k plan, employers can maximize contribution limits while avoiding IRS penalties and ensuring their employees are on track for retirement.

Plan factories are available to help local experts find the right safe harbor 401k plans that tend to bring steady revenue streams and allow key employees access to larger profit shares. With these plans, employers won't have trouble consistently matching funds for their employees without worrying about retirement age or meeting IRS requirements for employer contributions; if the plans break those rules, they could face hefty fines from the IRS.

2. SECURE Act Provisions

The Retirement Enhancement Secure Act of December 2019 included numerous provisions to enhance retirement accounts. One of the most important aspects of the Secure Act is that it expands the ability for Safe-Harbor plans to provide automatic increases to eligible workers. It also allows employers to increase non-elective contributions going forward and eliminate excess distributions in Plan Year ends amendments by 30th day of the Plan Year. As a result, Highly Paid Employees will have their IRS 2023 limitations adjusted as per Section 415d Notice 2022-55 Page 2, and IRS 2022 limitations adjusted as per Section 415d Notice 2021-61 Page 2. Furthermore, for tax consequences due to plan disqualification accessed Dec 2 2021, IRS 401k Plan Fix-it Guide - is available with tips on how to fix a failed 401k ADP/ACP Nondiscrimination Tests accessed Dec 2 2021, IRS 401k Plan Overview accessed Dec 2 2021, and IRS 401k Plan Fix-it Guide - 401k Plan - Overview accessed Dec 2 2021. In addition, participants can access the IRS 401K Resource Guide - Plan Participants - Summary Plan Description accessed Dec 2 2021 for more information on retirement benefits. The House Committee passed the Retirement Enhancement Act in December 2019 (Secure Act page 1 accessed Dec 2 2021). By clicking “accept” you agree to allow us to use cookies and other technologies to customize your experience and provide enhanced features such as site navigation, analyze site usage and marketing efforts.

Frequently Asked Questions

What are safe harbor provisions for 401k?

Safe harbor provisions for 401k plans are designed to protect employees from certain tax consequences and to ensure employers meet their legal obligations. They provide an added level of security and flexibility for employers and employees alike – learn more about the details here.

What are the best 401K Plan providers?

The best 401K Plan providers depend on your individual needs, budget, and retirement goals. We suggest you research providers to find the plan that best fits your needs.

What are the benefits of a safe harbor plan?

A Safe Harbor Plan is a great way to save for retirement while enjoying tax advantages and flexibility. It allows employers to make matching contributions to their employees' retirement savings, making saving easier and more rewarding. Learn more about how a Safe Harbor Plan can benefit you!

What are some disadvantages of a 401k?

401k plans may have some drawbacks, such as limited investment options, high fees, and penalties for early withdrawals. However, the advantages of 401k plans can outweigh these disadvantages when used as part of a comprehensive retirement planning strategy.

What is a safe harbor plan for 401k?

A safe harbor plan for 401k is a retirement plan that provides certain tax and contribution benefits to employers and employees. It allows employers to contribute more to their employees' retirement savings without triggering certain compliance tests. Explore our website to learn more about how your business can benefit from a safe harbor plan.

Featured Images: pexels.com

Profile photo of Tillie Fabbri

Tillie Fabbri

Writer at CGAA

View Her Articles

Tillie Fabbri is an accomplished article author who has been writing for the past 10 years. She has a passion for communication and finding stories in unexpected places. Tillie earned her degree in journalism from a top university, and since then, she has gone on to work for various media outlets such as newspapers, magazines, and online publications.

View Her Articles