What is a Safe Harbor 401(k)?

safe harbor 401(k)

A safe harbor 401(k) ensures employees are saving for retirement at every income level. This type of 401(k) has laws that prevent discrimination against lower-earning employees. It also protects employers from liability.


Investment retirement plans became popular in the early 1980s after the Employee Retirement Income Security Act of 1974 (ERISA) and the Revenue Act of 1978. The retirement plans got their name from Section 401(k) in the Internal Revenue Code. This section allowed tax-free deferred compensation. Furthermore, in 1984, The Tax Reform Act of that year introduced non-discrimination testing for the fair treatment of retirement contributions for all employees. 

The Tax Reform Act strengthened the nondiscriminatory rules and cap the annual contributions in 1986. The Small Business Job Protection Act created the safe harbor 401(k) and other plans for small businesses with 100 employees or fewer, in 1996. In addition, in 1998, the safe harbor 401(k) automatically enrolled an employee in the program via negative election. And the employer contributes the same percentage to each employee. Also, the employer must provide retirement planning training and investment education to employees.

By 2017, there were over $5 trillion in 401(k) assets. However, a survey determined there is over $24 billion unclaimed. Employees aren’t taking advantage of the contribution match offered by their employers. This year, the contribution limits are $19,000 if you’re under 50 years of age, and $25,000 if you’re 50 or older. At age 50, you can make additional contributions deemed “catch-up,” since you are closer to retirement.

Company Participation

It might seem like companies have no reason to participate. However, The Pension Protection Act of 2006 updated the safe harbor 401(k) to also reduce a company’s liability due to market fluctuation in specific investment alternatives. It also provides tax benefits and costs less to set up than other plans.

There are three types of safe harbor employer matches. Fisher Investments breaks them down like this:

  1. “Non-Elective Safe Harbor: Eligible employees get an annual employer contribution of 3% of their salary,” fully vested, whether or not they contribute to the plan. 
  2. “Basic Safe Harbor Match: The employer matches 100% of the first 3% of each employee’s contribution and 50% of the next 2%.” Employees are required to contribute to receive the match. 
  3. “Enhanced Safe Harbor Match: The employer matches 100% of the first 4% of each employee’s contribution.” Employees are required to contribute to receive the match.

Non-discrimination Testing

ERISA updated the requirements to meet the safe harbor criteria in 2007. If a company fails, they will have to pay fines, be disqualified from using the plans, or have a hefty lawsuit to handle. Every year the companies undergo discrimination testing to guarantee compliance, and the safe harbor plans reduce the workload.  Additionally, employers can utilize third-party administrators (TPA) to manage the 401(k) plans’ day-to-day operations. These TPAs would prepare any documentation required by law related to the programs. 

There are various parts to the testThere are formulas to calculate employee participation in a 401(k) plan for the previous year. These tests determine if high earning employees’ account balances are greater than 60% of the total balance. Additionally, some of the tests won’t apply if there is a safe harbor match. Also, safe harbor 401(k) plans will pass if there are no additional contributions. 

Any company that does not pass the test has to follow the Internal Revenue rules for remedy.

Read More

401(k) for Dummies

What To Do When You Have a Bad 401(k) Plan

Tax Trouble: Signs You Need Help with Tax Debt Relief