401(k) Safe Harbor Plan
This type of plan is basically a 401(k) with an employer match where the employer makes annual contributions on behalf of the employees and then the contributions are vested immediately, meaning that the employer match amount immediately belongs to the employee should they leave the company, rather than incrementally through the years of their employment. Benefits of having a Safe Harbor provision in a 401(k) plan include exempting your company from annual compliance testing, reducing a company’s taxable income, and optimizing the company’s and highly compensated employees’ personal savings accounts by maximizing contributions to the 401(k). Under this definition, an employee is considered highly compensated if they work for the company, own 5% or more of the company or are family of someone who does, and earn more than $130,000 annually (as of 2020). Without a Safe Harbor provision in a plan, these employees are more limited in what they can contribute annually, generally not more than 2% of the average annual salary of all employees who are not considered highly compensated. The employer contribution must be made each year to qualify for this type of plan.
A Safe Harbor match, which is the employer contribution, may be set up in one of three ways:
- Non-Elective Safe Harbor: In this option, eligible employees get 3% of their salary as an annual employer contribution. This immediately vested amount will go into the employee’s 401(k) account whether the employee contributes to their own plan or not.
- Basic Safe Harbor Match: With this option, the employer matches 100% of the first 3% of each employee’s contribution, and then 50% of the next 2%. Unlike the Non-Elective option, to get this match the employee must be contributing to their own account.
- Enhanced Safe Harbor Match: With this option, the employer matches 100% of the first 4% of each employee’s contribution. As with the Basic Safe Harbor Match, to get this match, the employee must be contributing to their own account.
