Safe Harbor 401k Rules-A Disadvantage To Employees

by 401kadmin

What do the Safe Harbor 401k rules and the lottery have in common?

With both, you have to be in it, to win it. The Safe Harbor 401k rules state that you have to make a 401k contribution to get a match. Unfortunately this is a very regressive strategy as it hurts those who can’t afford to save.

The Safe Harbor 401k rules state that you can make a matching contribution equal to 100% of the 401k contribution up to 4% of pay. This is a very popular Safe Harbor 401k plan design. Thus if you contribute 3% of your pay, you will get a 3% of salary match. However if you don’t contribute to the 401k, you don’t get a matching contribution.

In today’s economy more and more employees are living paycheck-to-paycheck and can’t afford to contribute money to a 401(k). This leaves the business owner’s and officers to contribute to the 401k while the other employees opt out since they can’t afford to make a contribution. The 401k non-discrimination rules, created in 1986, were supposed to prevent business owners taking advantage of a 401k when no other employees were participating.

The top heavy test was also created to prevent business owners from taking advantage of a 401k when no other employees were. The top heavy test, forced employers to make a 3% of salary contribution to the employee’s account.

However the Safe Harbor 401k rules changed all of this.

Thus as long as you follow the Safe Harbor 401k rules, you did not have to pass the non-discrimination tests or the top heavy tests. This allows business owners the opportunity to have a retirement plan for themselves, without having to contribute money for the employees.

If you want to read more about the Safe Harbor 401k rules and problems employees face when trying to save for retirement, buy the new book The Retirement Crisis.
“The Retirement Crisis” is a book on a mission to prove that the financial problems plaguing the majority of American workers, professionals, entrepreneurs and even business owners can be solved, quite simply.