Safe Harbor 401k

Safe Harbor 401k

Employers have always complained about the complexity of 401(k) non-discrimination testing.  As a result of failing the testing, many highly compensated employees got refunds.  Enter the Safe Harbor 401k. The Safe Harbor 401k did away with most of the complex testing. At first, there was very little interest in the Safe Harbor 401k.  Now the Safe Harbor 401k is by far the most popular type of 401k in the market today. 

Safe Harbor 401k Designs

In order to eliminate the complex testing requirements, a 401k must follow a specific matching formula.  By far the most common Safe Harbor 401k, is the Basic Match.  The Basic Safe Harbor 401k match is 100 percent of the first 3 percent of pay, plus 50 percent of the next 2 percent of pay. Thus, if an employee contributes 5% of salary, the employer would have to contribute 4% of salary as the Safe Harbor 401k match.

The other Safe Harbor 401k match is not really a match at all.  It is an across-the-board 3% of salary contribution that does not require the employee to participate in the 401k.  This is less popular as everyone gets the 3% contribute whether or not they participate in the 401k.  Thus the 3% across the board contribution is more expensive than the basic Safe Harbor 401k match.

Safe Harbor 401k DrawBacks

There are a few drawbacks to the Safe Harbor 401k.  First employees can’t take a hardship distribution from their Safe Harbor 401k match account. 

In addition, stopping the Safe Harbor 401k match during the middle of the year can be tricky.  You’ll definitely want to speak with someone about this before you stop making the Safe Harbor 401k match.