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Is a Safe Harbor 401(k) Right for You?

Employee Benefits

An employee benefit that helps employers

A 401(k) plan is an excellent benefit to prepare for retirement, save on taxes, and attract and retain employees. However, traditional 401(k) plans can sometimes limit business owners and other highly compensated employees from maximizing contributions based on certain non-discrimination testing requirements. A 401(k) with a safe harbor provision offers a solution.

Give a little, get a lot

A safe harbor 401(k) plan requires the company to make a mandatory contribution to the plan participants (either a match or a non-elective contribution). Those contributions benefit the employees, the company, and the business owner as follows:

  • Most testing requirements are automatically satisfied.
  • Business owners and highly compensated employees (HCEs) have greater ability to maximize salary deferrals.
  • Employer contributions encourage employee participation in the plan and discourages turnover.

Traditional 401(k) vs. Safe Harbor 401(k)

This chart shows the comparison of these two types of 401(k) plans. The key differences are seen in employer contributions, vesting, and testing.

Feature Traditional 401(k) and Owner Only 401(k) Safe Harbor
Maximum Employee Deferral $18,500* $18,500*
Roth Contribution Yes, within deferral limit Yes, within deferral limit
Catch-up Contributions (for participants 50 or older) $6,000* $6,000*
Employer Contribution Employer option

Matching contribution of 100%, up to 3% of compensation, and 50% of the next 2%,


Non-elective contribution of 3% of compensation to all eligible participants

Vesting Options available

Immediate (Safe Harbor contributions)

Options available (Other contributions)

Loans Yes Yes
ADP/ACP Testing Yes No
Top-Heavy Testing Yes Generally satisfied
Investment Providers  Choice of many Choice of many
Compatible with Profit Sharing Plans Yes Yes

*Limit indexed annually by the IRS.

When to amend a traditional plan to include safe harbor

If you already offer a traditional plan and answer yes to any of the following questions, you may benefit from the safe harbor provision:

  • Has your plan failed compliance testing, resulting in returns of excess contributions or mandatory corrective employer contributions?
  • Are you or your HCEs limited in how much they can contribute?
  • Do you already offer an employer match?
  • Do you have a company with 25 employees or fewer?

Deadlines to start a safe harbor 401(k)

A new plan with a safe harbor provision can be started any time before October 1 of a given calendar year. If you have less than 100 employees, and are starting your first benefit plan, you may qualify for tax credits of up to $1,500 ($500 per year for 3 years). This tax credit is meant to offset setup and administrative pricing. In addition, employer contributions are tax-deductible for the firm.

A traditional 401(k) can be amended to add a safe harbor provision at least 30 days prior to the beginning of the calendar year.

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This website contains articles posted for informational and educational value. Paychex is not responsible for information contained within any of these materials. Any opinions expressed within materials are not necessarily the opinion of, or supported by, Paychex. The information in these materials should not be considered legal or accounting advice, and it should not substitute for legal, accounting, and other professional advice where the facts and circumstances warrant.