Employers with a Safe Harbor 401(k) plan must choose one of two options: to match employee contributions or to make nonelective contributions. Unlike matching contributions, nonelective contributions are given to all eligible employees even if they are not making salary contributions to the plan. The benefit of a Safe Harbor 401(k) for employers is that in exchange for making contributions to their employees, they are exempt from annual IRS testing.

What are the rules for Safe Harbor nonelective contributions?

  • Depending on how the plan is drawn, employees typically can contribute to their own 401(k)s.
  • All eligible employees will receive a fund deposit from the employer.
  • The employer funds are put into the accounts, regardless of whether or not employees save.
  • The nonelective contributions are non-forfeitable and 100% vested immediately.

What are the minimum and maximum nonelective contributions?

The MINIMUM nonelective contribution for a Safe Harbor plan is 3% of an employee’s salary. So, for instance, if an employee earns $300,000 in 2024, the employer would put at least $9,000 into the worker’s 401(k) account.

The MAXIMUM nonelective contribution for Safe Harbors is up to the employer’s discretion, but may not exceed the IRS limit of $69,000 for employees under 50 or $76,500 for employees age 50 or older.

Younger employees are allowed to put up to $23,000 into their accounts, while older employees making catch-up contributions are allowed up to $30,500. When these maximum limits are reached, employers could feasibly contribute $46,000 in additional compensation on top of what each employee saves.

Challenges of Nonelective Contributions

Offering nonelective contributions requires some additional administration and diligence. Since employees may not be playing an active role in the plan, it will be up to employers to carefully select funds for the plan that can meet all employee needs. Qualified default investment alternatives, which include target-date funds, lifecycle funds, balanced funds, and professionally managed accounts, can make this task simpler.

Alternatives to Nonelective Contributions

Another option to satisfy the requirements of a Safe Harbor 401(k) is to make matching contributions based on how much employees participate and save. There are two types of Safe Harbor match:

  • Basic Match – employers match 100% of employee contributions up to 3%, plus a 50% match on the next 2% of compensation.
  • Enhanced Match –employers match 100% of employee contributions up to 4%, not to exceed 6%.

Employer match is often presented as the most affordable option since not all employees typically will choose to participate in the plan or save the maximum amount. However, if all employees maximize their savings to obtain the full employer match, nonelective contributions can be the less expensive choice.

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Getting a Safe Harbor 401(k) with Nonelective Contributions

A Safe Harbor provision can be written into a new plan or amended as a new provision of an existing plan. Contact Ubiquity—a low-cost, flat-fee administrator of 401(k) plans, including the Safe Harbor 401(k)—for details.