401(k) Safe Harbor Contribution Limits for 2021

Employers with safe harbor plans must make contributions to their employees’ plans in order to bypass the standard IRS nondiscrimination testing. They may make a 4 percent matching contribution, a 3.5 percent matching contribution, or a 3 percent non-elective contribution. All contributions are subject to 100% vesting.

The total combined employer/employee contribution limit increased by $1,000 in 2021 to $58,000 — or $64,500 if you’re over 50 and making the catch-up contributions.

The annual compensation limit is used in determining a participant’s allocation of employer contributions, which may not exceed $290,000 in 2021. This limit has increased from $285,000 in 2020.

For example, a company plan matching 5% of an employee’s earnings would not have to match 5% on an employee earning $1 million. Instead, the employer would be responsible for paying that employee 5% of the $290,000 maximum cap.

If you haven’t set up a 401(k) Safe Harbor plan yet, you may be considering one if you’ve failed nondiscrimination testing in the past or if you have a lot of highly compensated employees who want to maximize their retirement savings without reprisal.

For 2021 – the same as 2020 — a “Highly Compensated Employee” is defined as someone making more than $130,000 a year or owning more than 5% of the business in the previous year. If the average employee puts 4% of their income into the retirement plan, a highly compensated employee generally cannot put more than 6% of their income in. Key employees must own less than 60% of the total assets in the plan, so the plan is not considered “top-heavy.”

To pass the IRS fairness testing easily, business owners may adopt a safe harbor plan and agree to make contributions on behalf of all employees. The deadline to adopt a new Safe Harbor 401(k) plan in 2021 is October 1, 2021. The deadline to adopt the amendment necessary to convert a traditional 401(k) plan into a 3% nonelective safe harbor plan for 2021 is December 2, 2021.

Call Ubiquity to set up a Safe Harbor 401(k) plan today. We offer one of the industry’s most affordable plans at a low, flat, monthly rate with no AUM or per-person fees.