What Is A Safe Harbor Plan?

It is a 401(k) plan that is able to bypass some of the non-discrimination, Top-Heavy, and participation testing by making contributions on behalf of employees.

What are the funding requirements?

Either an employer contribution of 3% for all eligible employees or a match on employees making deferrals of 100% up to 3% of compensation, and 50% on the next 2% for a total of 4%. These contributions must be 100% vested immediately.

What are some benefits to a Safe Harbor plan?

  • By being able to bypass some testing, the highly compensated (5% or greater owners or those making over a certain income threshold) are able to fund to the maximum levels.
  • Owners can also benefit from matching and profit sharing contributions.
  • No longer needing to make Top-Heavy minimum contributions.
  • Better budgeting of required funding by the company.

What are some downfalls to a Safe Harbor plan?

There will almost always be funding requirements, which can put strain on the company during difficult times.
If there is frequent employee turnover, the Safe Harbor contributions can be taken by participants instead of going back into the plan.