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What Are My Retirement Plan Design Options? Part 3: Safe Harbor Plans Thumbnail

What Are My Retirement Plan Design Options? Part 3: Safe Harbor Plans

So far we have discussed profit sharing plans and 401(k) plans. We learned that profit sharing plans are the backbone of all defined contribution plans. We also found out that 401(k)s can give business owners even more flexibility with employer contributions. But what's the most popular plan design option? It's the Safe Harbor 401(k). We'll discuss why this is the most popular option and why it might be a good option for your retirement plan's design.


In a 401(k) plan, one of the drawbacks that can affect owners and highly compensated employees is yearly plan testing. What is that? I won't get into every detail with testing(I want you to stay wake), but it boils down to, is your 401(k) plan fair for all employees? There are a couple of tests that are done yearly. ADP/ACP test and the top-heavy test. If your plan fails either of these tests, then owners and highly compensated employees could be limited in how much they can save. However, in a Safe Harbor 401(k), plans may eliminate ADP testing, which enables highly compensated employees to defer up to the legal limit each year the Safe Harbor is in effect. But there is a trade off of requiring employer contributions or matching contributions to eligible employees.


Safe harbor 401(k) plans, typically require an employer to make either a non-elective contribution or an eligible matching contribution to participants.

safe harbor non-elective contribution

A fully vested non-elective contribution of 3% eligible compensation to all employees eligible to participate (or
only on behalf of non-highly compensated eligible participants.)

safe harbor matching contribution

A fully vested matching contribution, equal to 100% of a participant’s elective contributions not in excess of 3%
of the participant’s compensation for the plan year, plus 50% of the participant’s elective contributions over 3% but not in excess of 5% of compensation for the plan year.

Qualified Contribution Arrangement

QACAs allow some flexibility in vesting of the Safe Harbor contribution but also require certain changes to the process by which employees are able to choose to make contributions.

Safe Harbor 401(k) plans must provide all eligible employees with a notice of the Safe Harbor contribution at least once a year, and at certain other times. Failure to provide the safe harbor notice in a timely manner will negate the benefits of the Safe Harbor design, subject the plan to the ADP test, and may still require the employer to make the Safe Harbor contribution and/or other corrective actions.

We will use the same company example that we have used with the profit sharing and 401(k) plans. In this example the owners are making the non-elective contribution of 3% to eligible employees. The owners are still maxing out their individual 401(k) contributions. But the owners are still under their total allowable contributions amount. If the owners would like to hit their total allowable limits, they would still be able to make profit sharing contributions. But those contributions still have to be uniform. 




Contribution of 3%
401(k) Salary

Owner 155$290,000
Owner 245$225,000
EMPL 155$62,000
EMPL 246$53,000
EMPL 335$47,000
EMPL 426$38,000




We didn't show the Safe Harbor matching provision, but it's very similar. The only difference in this example is that the employees not savings anything wouldn't have to be matched. So based on your employee's individual contributions, the matching provision might be the best way to go. If every employee was savings 6% or more of their own money, then the non-elective contributions would require less employer contributions.

As you can see, the more options you have in plan design, the more complex things can get for business owners. Every situation is different, so it's important to work with a professional to help guide you in what would make the most sense for your company and employees.

Have questions? Let's talk.


The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.