There are three formulas used to determine safe harbor contributions: two are matching, using a basic or enhanced matching formula. The third is to make nonelective contributions to all eligible employee plans regardless of employee participation.

With a Safe Harbor 401(k), Employer Matching Is Mandatory

The Safe Harbor provision allows employers to bypass the administrative headache, uncertainty, and expense of ADP, ACP, and top heavy nondiscrimination testing. The one caveat is that the employer must agree to contribute to the plans of all eligible employees.

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Employer Match Options

Employers can choose from the following Safe Harbor 401(k) formulas:

  • Basic Match – Match 100% of employee contributions on the first 3% of deferred compensation, with the option to add a 50% match on the next 2-5% of deferrals
  • Enhanced Match – Match 100% of employee contributions on the first 4-6% of deferrals
  • Nonelective Contribution – Match 3% (or more) of gross pay for every eligible employee, regardless of their participation or contributions

Highly compensated employees (HCEs) can be excluded from these contributions, but plan participants must be 100% vested, meaning that your matched contribution belongs to all employees right away.

The maximum limit for a Safe Harbor plan is the same as any 401(k). For 2024, individuals under age 50 can contribute up to $23,000 to their plans, and individuals age 50 and older can contribute up to $30,500. The total combined contribution allowance is $69,000 for younger workers and $76,500 for older workers.

Safe Harbor Contributions

Safe Harbor contributions are ideal for:

  • Small businesses with employees who do not participate – HCEs can max out their 401(k) contributions even if other employees aren’t participating. You can even add a profit-sharing component and still pass compliance testing.
  • A top heavy 401(k) plan – If owners and top-paid executives are putting greater than 60% of the total assets into the plan, then the Safe Harbor allows employees to maximize their contributions without penalty.
  • Businesses who have failed nondiscrimination testing – Adding a Safe Harbor provision is the best way to show you are offering a fair retirement saving opportunity for all your workers, without having to worry about the penalty, refunds, or administrative hassle of potentially failing a test.

How Much Will Safe Harbor Contributions Cost?

It may seem counterintuitive, but the 3% non-elective contributions can cost employers less than the 4% match at a certain point. The overall participation and savings rate will influence the total cost of the plan.

To calculate how much a Safe Harbor matching contribution will cost, run this formula:

# employees x % employees participating x $ average salary x % safe harbor contribution = $$

Let’s consider a few different scenarios for an employer with 50 employees whose average salary is $40,000.

  • Basic 4% Match, 60% participation rate: The employer contribution will cost $48,000 a year.
  • 3% Nonelective contribution for all employees: The employer pays $60,000 a year.
  • Basic 4% Match, 100% participation rate: With everybody saving, your 4% match costs $80,000.

Choosing which Safe Harbor contributions to make is a decision based on your business unique situation, goals, and needs. Contact Ubiquity, a low-cost, flat-fee 401(k) administrator, to explore your options.