Insights and Perspectives

Is a safe harbor plan right for your small business?

Determining the right type of 401(k) plan for your small business can be challenging. While a traditional plan may work for you, there are other options that may be a better fit for your employees and your company—including a safe harbor plan.

Key differences between traditional 401(k) plans and safe harbor plans

Although traditional 401(k) plans allow both employees and employers to contribute to employee accounts, these plans are subject to discrimination testing to ensure highly compensated employees (HCEs) are not disproportionately advantaged in the plan—meaning, the amount HCEs can contribute may be restricted by maximum income and discrimination testing limits. With a safe harbor plan design, employers can match employee contributions or make non-elective safe harbor contributions without many of the Department of Labor (DOL) or Internal Revenue Service (IRS) regulations that come with traditional plans.

Traditional 401(k) plans may also limit the amount an employer can personally contribute to their retirement savings. With a safe harbor plan, an employer can make a minimum contribution to their employees’ accounts while maximizing the personal contributions they and their HCEs can make to the plan. This can serve the added benefit of offsetting the potentially higher cost of a safe harbor plan.

Benefits and considerations of safe harbor plans

A safe harbor plan can be a win-win for employees and their employers— particularly for small business owners who want the benefits of a 401(k) plan without having to satisfy required annual compliance testing.

Safe harbor retirement plans can have several additional advantages for small businesses:

  • Business owners and other HCEs can contribute the maximum annual deferral amount into their accounts.
  • Plans can bypass top-heavy rules and discrimination tests for salary deferrals and employer contributions, so long as they meet the safe harbor provisions.
  • IRS top-heavy and non-discrimination testing effects are limited.
  • Business taxes may be reduced and employees can build larger nest eggs—all at the same time.

When considering a safe harbor plan, here are some things to keep in mind:

  • Safe harbor plans can be more expensive than traditional 401(k) plans.
  • If your business has inconsistent revenue streams, it may be difficult to maintain year-round matching or non-elective contributions.
  • Plans must meet several qualifying criteria to get the benefits of safe harbor, including making required employer contributions, following mid-year amendment restrictions, and meeting potential notice requirements.

Could a safe harbor plan be right for your company? One of our dedicated sales consultants can help you decide. Call us at 866-929-2525 learn more.