401(k) Safe Harbor Contributions

A 401(k) plan may be designed to meet certain requirements under the Internal Revenue Code which make it a safe harbor 401(k) plan. There are several safe harbor options available, but the most common safe harbor options require making employer contributions which meet either the matching contribution safe harbor or the non-elective contribution safe harbor, as described below.

Matching Contribution Safe Harbor

The matching contribution safe harbor requires that the employer make a matching contribution equal to 100% of each employee’s deferrals up to 3% of compensation and 50% of each employee’s deferrals between 3% and 5% of compensation. As an alternative, the employer may choose to make a matching contribution equal to 100% of each employee’s deferrals up to 4% of compensation. The employer may also choose to provide these safe harbor matching contributions only to non-highly compensated employees. These safe harbor matching contributions must be fully vested when made.

An employer can choose to match deferrals in excess of 5% of compensation; however, if an employer matches deferrals in excess of 6% of compensation, the safe harbor will no longer apply to the matching contributions portion of the plan. This would require the employer matching contributions to be tested; however, the safe harbor would still apply to the deferrals portion of the plan for purposes of the testing safe harbor. For more information regarding nondiscrimination testing, click here.

Non-elective Contribution Safe Harbor

The non-elective contribution safe harbor requires that the employer make an employer non-elective contribution equal to at least 3% of compensation for each employee who was eligible to defer under the plan, regardless of whether they actually chose to make deferral contributions. The employer may choose to provide these safe harbor non-elective contributions only to non-highly compensated employees. These safe harbor non-elective contributions must be fully vested when made.

One optional variation on the non-elective contribution safe harbor (which is not commonly used) is the “wait-and-see” alternative. Under this alternative, the employer waits until near the end of the plan year (when it can run preliminary nondiscrimination tests for the plan year) to decide whether the plan will provide the 3% safe harbor non-elective contribution (alternatively, the employer may decide to make a 4% safe harbor non-elective contribution).

If the employer decides to make the plan a safe harbor plan for that year by making the 3% or 4% safe harbor non-elective contribution, the employer must amend the plan to include the safe harbor plan provision no later than 30 days before the end of the plan year. On and after January 1, 2020, no advance notice to employees is required.

Testing Benefits for Safe Harbor 401(k) Plans

The benefit of providing a safe harbor 401(k) plan is that the deferrals and safe harbor employer contributions are not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans. For more information regarding nondiscrimination testing, click here.