Navigating the Waters: Safe Harbor 401(k) Plan Options

Most 401(k) Plan Sponsors share the same ultimate goals for their organizations’ 401(k) Plan: maximize executive savings, minimize administrative burden, and provide a valuable benefit by helping their employees achieve a successful retirement along the way.

In many organizations, however, these goals are not so easily accomplished. But, achieving victory doesn’t have to be difficult! Although not the right strategy for every organization, in many cases, utilizing a Safe Harbor plan design can be an effective way to overcome these challenges. There are various options within the Safe Harbor framework, however, so it’s important to understand the differences of each before determining if any would be a good fit for your organization.


In general, the Internal Revenue Code (IRC) requires all qualified employer plans to meet certain nondiscrimination requirements. Employer plans established under IRC Sec. 401(k) are subject to one or two additional tests. The first test, applicable to employee deferrals only, is known as the “actual deferral percentage” (ADP) test. The second possible test is the “actual contribution percentage” (ACP) test and is applied only when there are employer-matching contributions. However, The Small Business Job Protection Act of 1996 provided 401(k) plans with alternative, simplified methods of meeting these additional nondiscrimination requirements. 401(k) plans that adopt one of these alternative methods are referred to as “safe harbor” 401(k) plans.

Why Could It Be Beneficial?

By adopting safe harbor plan provisions, the plan is deemed to pass the ACP and ADP tests. In passing these tests, no “corrections” need to occur to bring the tests back down into passing range had they failed otherwise. These ‘corrections’ usually come in the form of taxable refunds to Highly Compensated Employees (HCEs) and, in general, are not well-received by those individuals. When the plan passes ADP Testing (automatically or otherwise), HCEs have the opportunity to “max out” their 401(k) savings up to the IRS’ annual contribution limit regardless of how much their Non-Highly Compensated Employee (NHCE) counterparts choose to save.

Requirements for a Safe Harbor 401(k) Plan¹

Effective January 1, 1999, a 401(k) plan which operates as a safe harbor plan must meet one of two employer contribution formulas, as well as a written notice requirement:

  • Employer contributions: One of two formulas must be followed.
    • 100% vested of 3% of compensation: The employer may make a 100% vested contribution of 3% of compensation to all non-highly compensated participants.
    • 100% vested matching: As an alternative, the employer may choose to make a 100% vested matching contribution to all non-highly compensated participants who defer under the plan. The match must be 100% of the first 3% of compensation deferred, plus 50% of the next 2% of compensation deferred. The match may also be at the rate of 100% of the first 4% of compensation deferred. If the employer is making the matching contributions during the year, the safe harbor rules permit the plan to compute the safe harbor match on a “per pay period” basis, or on an annual basis. If computed annually, the employer may have to “true up” the match after the plan year end.

The plan may not have any restrictions on receiving the safe harbor 3% employer or matching contributions, except the minimum age and service requirements needed for plan participation. Neither a 1,000-hour work requirement, nor a requirement that a participant be employed at the end of the plan year, is permitted.

  • Written notice: To qualify as a safe harbor plan, a 401(k) plan must also provide for written notice to the employees, with both content and timing elements.
    • Content: The notice must describe the various conditions concerning the employer’s contribution(s), the conditions and methods for employee deferrals, and the employee vesting and withdrawal provisions of the plan.
    • Timing: The employer must give notice at least 30 (but not more than 90) days prior to the beginning of the plan year.

If the employer fails to make the required safe harbor contributions, or to meet any other safe harbor requirement, the IRS treats this like any other disqualifying plan failure. The required contributions must be made and any other failures corrected on a timely basis.

The IRS does allow the employer to stop either the safe harbor 3% or matching contributions during a plan year by following specific rules. The employer must provide at least 30 days’ advance notice to all eligible employees, ensure employees have a reasonable opportunity to modify their 401(k) contribution elections, and amend the plan accordingly. Furthermore, to stop either safe harbor contribution, it must be due to a substantial business hardship.

If the employer stops the safe harbor contributions during the plan year, the plan must meet the regular 401(k) plan non-discrimination requirements and, if applicable, IRS top heavy minimum contributions.

Automatic Enrollment Safe Harbor 401(k) Plan

A 401(k) plan with automatic enrollment will qualify as a safe harbor 401(k) plan if it provides for:

  • Automatic enrollment of newly eligible employees, at a default contribution rate of at least 3% of compensation, but no more than 10% of compensation.
  • Automatic annual increases of 1% per year, such that the employee’s 401(k) deferral is at least 6% by their fourth year in the plan.
  • Employer matching contributions of 100% on the first 1 % of compensation deferred and 50% on the next 5% deferred, or, alternatively, a 3% non-elective employer contribution to all participants.

Employer contributions must vest after 2 years with the Automatic Enrollment Safe Harbor 401(k) Plan.

A Safe Harbor 401(k) Plan may or may not be the right fit for your organization, but it’s important to understand the options available when making that determination. To discuss how these plan provisions could could impact your organization’s retirement plan, please contact us!


¹See IRS Notices 98-52, 2000-3 and IRS 401(k) regulations effective 1/1/06 for additional detail
Securities and investment advisory services are offered solely through Ameritas Investment Corp. (AIC). Member FINRA/SIPC. AIC and Summit Group of Virginia LLP are not affiliated. Additional products and services may be available through Summit Group of Virginia LLP that are not offered through AIC. Representatives of AIC do not provide tax or legal advice. Please consult your tax advisor or attorney regarding your situation

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