Safe harbor plans are popular in a tight labor market

With the labor market becoming more competitive, employers are looking for new ways to attract and retain good employees. A safe harbor match designed 401(k) plan provides a generous and popular benefit. By opening a safe harbor plan you are investing in your employees’ retirement and incentivizing them to save at the same time.

Why should my company consider a safe harbor plan?

There are several reasons a safe harbor plan may be a good option for your business. Below are just a few:

  1. Talent retention: Your employees will feel appreciated and happy knowing their employer is committed to their future. This in turn will help your business retain its talented employees in a competitive marketplace.
  2. Employer tax savings: As the employer, you can enjoy additional tax savings for making safe harbor contributions. Employer contributions are deductible as a business expense on the employer’s federal income tax return.
  3. Flexible plan designs: As your business grows and changes, certain safe harbor formulas may not make sense. There are a variety of formulas at your disposal that can ensure your business maintains safe harbor status.
  4. Highly compensated employees: Your company’s highly compensated employees can contribute more to the plan without jeopardizing the standing of the company’s plan. This can help incentivize highly compensated/key employees to continue their employment with your company instead of looking for more flexible benefits offers elsewhere.

What is a safe harbor 401(k) plan?

A safe harbor 401(k) plan is a retirement plan that ensures all eligible plan participants receive an employer contribution. In exchange for making the fixed employer contribution, employers get a “pass” on 401(k) non-discrimination testing (one of the checks the IRS puts on 401(k) plans to ensure they’re equitable to all employees).

What are the requirements of a safe harbor plan?

Any 401(k) plan can be designed to include a safe harbor contribution. When considering a safe harbor plan design, employers should understand that the employer contribution is a fixed, mandatory contribution. In most cases, that employer contribution is required to be immediately 100% vested.

For new 401(k) plans, timing restrictions will dictate the type of safe harbor plan design available in the initial (or first) plan year.

Are there different types of safe harbor plans? 

There are three basic “types” of safe harbor 401(k) plans. You must meet one of the following for your plan to be considered a legal safe harbor plan:

  1. Basic match: Company matches 100% on the first 3% of deferred compensation, plus a 50% match on the next 2% of deferred compensation.
  2. Enhanced match: Company match that’s at least as generous as the basic match at each tier of the match formula. A common formula is 100% match on the first 4% of deferred compensation.
  3. Non-elective: Company contributes 3% or more of each employee’s compensation, regardless of whether the employee also makes elective deferrals.

Because safe harbor contributions must be made annually, companies are implicitly required to have strong cash flow to meet their commitments. Our accounting professionals can advise you about the financial health of your business and help you with strategies for maintaining a healthy cash flow.

Are there contribution limits?

Basic employee deferral limits for safe harbor 401(k) plans are the same as traditional 401(k) plans. In 2021, these contribution levels are $19,500 ($26,000 for those aged 50 and over). What’s more, safe harbor provisions enable owners and highly compensated employees to max out deferrals without risking non-discrimination failure.

How much does a safe harbor 401(k) plan cost?

The more employees you have, and the higher their salaries are, the more expensive a safe harbor 401(k) will be for your company. If you offer a non-elective safe harbor plan, it will be easier to calculate the total budget for the plan because it is a percentage of your total payroll.

The total cost of the safe harbor match will depend upon employee contributions, which makes it difficult to predict. Typically, though, these are less costly to the employer than a non-elective safe harbor.

We work with several knowledgeable 401(k) plan administrators and will be happy to connect you if you would like to learn more about different retirement plan options for your employees. As always, please contact us if you have any questions.

Krystle Keys, CPA, is a Manager with our Business and Tax Advisory Group. She can be reached at