What’s a safe harbor 401(k) plan?

Plan sponsors who offer a traditional 401(k) plan must perform complex annual nondiscrimination tests to make sure their plan doesn’t favor highly compensated employees (HCEs). Because they’re often a deterrent, these tests led to the creation of the safe harbor 401(k) to encourage more small business owners to establish retirement plans. Safe harbor 401(k)s are exempt from most testing requirements and, therefore, may seem like the obvious solution for your company. Before you decide on your plan design, there are certain safe harbor provisions you need to understand.

Safe harbor 401(k) provisions 

The safe harbor 401(k) was created as part of the Small Business Job Protection Act of 1996. In exchange for avoiding nondiscrimination (e.g., actual deferral percentage (ADP)) and top-heavy testing, plan sponsors of safe harbor 401(k) plans have to make mandatory employer contributions and provide an annual written notice to employees. Let’s take a closer look at each of these rules.

Mandatory employer contributions

There are three types of contributions you can make to satisfy the safe harbor provisions, and your 401(k) plan document must reflect the option you’ve selected. All employer safe harbor contributions are immediately 100% vested, which means the money belongs to the employees and goes with them when they leave your employment, regardless of their years of service.

Safe harbor contribution


Employee eligibility

Basic safe harbor match

Match 100% of contributions up to 3% of employee’s compensation, plus 50% on the next 2% of compensation


Example: employee earns $30,000 and defers 4% of their salary for total deferrals of $1,200


Match = $1,050

$30,000 x 0.03 x 1.00 = $900

$30,000 x 0.01 x 0.50 = $150



All eligible employees who are contributing to the 401(k) plan

Enhanced safe harbor match

Match at least 100% of contributions up to 4% of employee’s compensation, not to exceed 6%


Example: employee earns $30,000 and defers 4% of their salary for total deferrals of $1,200


Match = $1,200

$30,000 x 0.04 x 1.00 = $1,200

All eligible employees who are contributing to the 401(k) plan

Nonelective contribution

At least 3% of employee’s compensation


Example: employee earns $30,000 and isn’t contributing to the 401(k) plan


Nonelective contribution = $900

$30,000 x 0.03 = $900

All eligible employees, including those not contributing to the 401(k) plan (similar to profit sharing contributions)

Annual written notice

How much an employee decides to contribute to a 401(k) plan is often influenced by how much the employer is contributing. Each year, plan sponsors who use either the basic or enhanced match must send employees a notice that outlines the safe harbor contribution and their rights to receive it. The notice must be delivered at least 30 days, but no more than 90 days, before the beginning of the plan year. For example, if your plan operates on a calendar year, the notice must be sent no earlier than October 1 and no later than December 1. You can combine your safe harbor notice with other required annual notices, such as an auto-enrollment notice.

The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) of 2019 eliminated the written notice requirement for safe harbor nonelective contributions, which makes sense, as all participants receive this contribution, regardless of how much they’re contributing to the plan.     

A traditional 401(k) versus a safe harbor 401(k)

Plan sponsors considering a safe harbor plan should conduct a cost-benefit analysis to determine whether adhering to the safe harbor requirements is worth not having to perform the nondiscrimination tests. This side-by-side comparison of traditional and safe harbor 401(k)s can help you with this assessment.


Traditional 401(k)

Safe harbor 401(k)

Deadline to establish a new plan

The business’s tax filing deadline, plus extensions


For example, C corporations generally have until March 15, 2022, to set up a new plan for 2021.

October 1


For example, businesses have until October 1, 2021, to set up a new plan for 2021.


Plan sponsor can choose age and hours of service, not to exceed age 21 and 1,000 hours

Plan sponsors must have the same requirements for both employer and employee contributions

2021 employee contribution limits

$19,500, plus $6,500 catch-up contribution for people age 50 and older


Employer contributions

Not required

Required (see above)


Flexible, can’t exceed six-year graded vesting schedule

100% immediate vesting

Actual deferral percentage (ADP) test


Generally exempt

Actual contribution percentage (ACP) test

Required if plan offers match or after-tax contributions

Generally exempt

Top-heavy testing


Generally exempt

Annual participant notices

Not required

Required (see above)


Midyear plan changes


Limited changes are permitted; participants must be notified 30-90 days before the effective date and be given 30 days to change their deferral election (see IRS Notice 2016-16)


Converting to a safe harbor 401(k)

What if you already have a traditional 401(k) plan? Can you change it to a safe harbor plan? The short answer is yes. But there are specific deadlines and other requirements that you need to be aware of based on the type of safe harbor contribution.

  • If you want to make a safe harbor matching contribution, the change will be effective on the first day of the following plan year—January 1 for calendar year plans. You must amend your plan document before that date and allot enough time to provide employees with a 30-day notice.
  • You can elect the safe harbor nonelective contribution at any time during the year, as long as the change is made 30 days before the end of the plan year (December 1 for calendar year plans) and the contribution is retroactive for the entire year. If you’re willing to increase the nonelective contribution to 4%, the deadline is extended to the last day of the next plan year (December 31 for calendar year plans). Both options require an amendment to your plan document.  

Is a safe harbor 401(k) right for your business?

Low participation by non-highly compensated employees (NHCEs), failed nondiscrimination tests, and easier administration are just a few of the reasons you might consider a safe harbor 401(k) plan instead of a traditional 401(k). Your financial professional and other plan advisors can help you decide if it’s the right solution for your organization.    

The content of this document is for general information only and is believed to be accurate and reliable as of the posting date, but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made herein

MGT-I 45339-GE 07/21  MGR0818211760014