What Is a Safe Harbor 401(k) and How Does It Work?

    A Safe Harbor 401(k) is an employer-sponsored retirement plan that provides eligible employees with employer contributions. Safe Harbor 401(k) employee contribution limits are the same as traditional 401(k)s. For example, for 2024, employees can contribute $23,000 or $30,500 for those aged 50 or older.

    Generally, traditional Safe Harbor 401(k) contributions are immediately fully vested unless they are a qualified automatic enrollment arrangement (QACA) with a Safe Harbor provision. In that case, a 2-year vesting schedule may apply. Employers must provide information about how the plan works to all eligible employees at least 30 days before the plan begins. 

    Safe Harbor 401(k) Benefits

    A Safe Harbor 401(k) can benefit employers and employees in the following ways. 

    Mandatory Employer Contributions 

    Safe Harbor plans require employers to make mandatory contributions for all eligible participants, regardless of whether the employee contributes to their account. 

    There are three general types of employer matching for Safe Harbor 401(k)s: 

    1. Basic matching: The employer matches 100% of an eligible employee’s contributions, up to 3% of their salary, and 50% of contributions over 3% but below 5%.
    2. Enhanced matching: The employer meets or exceeds the basic matching formula, commonly using the formula of a 100% match on the first 4% of deferred compensation. 
    3. Non-elective contributions: The employer contributes at least 3% of every eligible employee’s compensation, whether or not they defer. 

    Contact an EP Wealth advisor for guidance on your employer’s 401(k) offerings and practical strategies for growing your retirement savings. 

    No Nondiscrimination Testing 

    Employer contributions are fixed and mandatory with a Safe Harbor 401(k). For this reason, they are generally exempt from the yearly IRS nondiscrimination testing (NDT) required for traditional 401(k)s. 

    NDT is designed to help even the playing field for all employees, regardless of income. These tests assess how much employees and employers contribute to company 401(k)s and determine whether highly compensated employees (HCEs) benefit unfairly. However, this testing can often be complex and costly for employers. Plus, companies that fail NDT must take corrective action to fix any problems, often at a substantial cost to the employer. 

    Because Safe Harbor 401(k) plans require employer contributions and encourage more employees to participate, the government offers them “safe harbor” to bypass testing. This is a good incentive for companies that have previously failed NDT or have HCEs who want to contribute more to set up a new Safe Harbor 401(k) or add a Safe Harbor provision to an existing plan. 

    Maximized Contributions for HCEs   

    When key employees like owners and HCEs contribute heavily to a traditional 401(k), they risk failing NDT for being “top heavy.” The IRS requires corrective action when key employees’ combined asset balance exceeds 60%. This is not true for a Safe Harbor 401(k), where HCEs can contribute more to their retirement plans without risking a failed compliance test. 

    Safe Harbor 401(k)s can be a valuable tool for reaching retirement savings milestones. EP Wealth retirement planning professionals help clients strategize to maximize their savings with these and other investments. Call or connect online to locate a financial advisor near you.

    DISCLOSURES

    • EP Wealth Advisors, LLC. is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability
    • Request an appointment with an EP Wealth Advisor when you have a minimum of $500,000 in investable assets – which includes qualified retirement plans (IRA, Roth IRA, 401(k), taxable brokerage, cash (savings / checking) and CDs. Investable assets do not include your home, vehicles, or collectibles.
    • Information presented is general in nature and should not be viewed as a comprehensive analysis of the topics discussed. It is intended to serve as a tool containing general information that should assist you in the development of subsequent discussions. Content does not involve the rendering of personalized investment advice nor is it intended to supplement professional individualized advice.   
    • Hiring a qualified advisor and/or financial planner does not guarantee investment success and does not ensure that a client or prospective client will experience a higher level of performance or results. No guaranty or warranty is made that any direct or implied results or projections being represented here will be met or sustained.
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    • The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisors.  Before making any decision or taking any action, you should consult with a professional tax advisor who has been provided with all pertinent facts relevant to your situation. EP Wealth Advisors is not in the business of providing legal or tax advice. Please consult with a CPA, tax professional, and/or attorney regarding your specific situation.

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