What Is the Difference Between a 401(k) and a Safe Harbor 401(k)

Worried about passing annual nondiscrimination tests with your small business 401(k)? A Safe Harbor plan design might be the solution for your organization!

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Small business owners know that offering employees access to a company-sponsored 401(k) retirement savings plan is a competitive way to attract and retain talented workers.

Setting up a plan isn’t difficult when you work with a small business 401(k) plan administrator like Ubiquity, but there are some choices to be made – notably whether to go with a traditional 401(k) or a Safe Harbor 401(k). These two plans will both offer tax advantaged retirement savings, but are notably different in annual testing requirements, employer contributions, and vesting schedules.

Annual Testing Requirements

A traditional 401(k) requires businesses to pass annual nondiscrimination tests that show the plan is fair and open to all employees — not just Highly Compensated Employees making over $130,000 a year. Most employers will conduct plan audits once a year to gauge how well rank-and-file employees are saving, compared to the executives. As a general rule, Highly Compensated Employees cannot contribute more than 2% of the average of all other participating employees. If the plan lacks balance, highly compensated employees may receive a surprise end-of-year refund and pay a higher-than-expected tax bill. Another option would be for employers to make contributions to all employees to bring the plan into compliance.

Comparatively easy administration attracts many employers to a safe harbor plan design. A safe harbor 401(k) is granted a free pass on annual nondiscrimination testing – so long as the employer agrees to make contributions to all eligible employees. This allows business owners the freedom to maximize their own payments and compensate key employees as best they can.

To learn more about these benefits and to find out whether a Safe Harbor plan is the right choice for your business, contact the Safe Harbor 401(k) plan administrator Ubiquity for a free consultation.


Employers do not need to contribute to employee plans at all with a traditional 401(k). They can simply promote the plan to workers and let them choose whether to participate and at which rate to defer. About half of 401(k) plans offer a match ranging from 1-6%.

Safe harbor 401(k)s require an employer contribution based on one of the following formulas:

  • Basic Match–The employer agrees to match 100% on the first 3% of employee deferrals, plus match 50% on employee deferrals for the next 2% of compensation.
  • Enhanced Match–The employer agrees to match 100% of the first 4% of employee deferrals.
  • Non-elective Contribution–Even if employees do not contribute to their own plans, the employer makes a contribution worth 3% of each employee’s salary into his or her 401(k).

Vesting Schedules

A traditional 401(k) can include a vesting schedule, designed to increase employee retention. Employees participating in the plan can always keep their own money they defer to the plan, but they must stay with the company for a certain number of years before the employer matches or contributions become “theirs.” If they leave the company or get fired before the vesting date, they forfeit all funds the employer put into the plan on their behalf.

By contrast, a safe harbor 401(k) requires all money to be immediately vested. However, employers may choose to add discretionary contributions (like profit shares) that can be on a vesting schedule, which can incentivize workers to stay with the company.

Catchup Contributions

Many people want to contribute more as retirement draws near. Participants in 401(k) and 403(b) plans are able to make additional “catch-up contributions” of $6,500, starting at age 50. This helps late starters save quicker, above and beyond the annual limit. Plan participants would be able to increase catch-up contributions from the current $6,500 to $10,000 per year for those ages 62, 63, and 64. At 65, the $6,500 allowance returns. These figures may be adjusted for cost-of-living increases.


If you’d like to start a new traditional 401(k) plan for 2021, you have until either March 15, 2022 (if you’re an S-Corp or Partnership) or April 15, 2022 (if you’re a C-Corp or Sole Proprietorship). If you’ve filed for the extended deadline, you may have an additional six months — until September or October 15 – to adopt the new retroactive plan.

If you’d like to start a new safe harbor 401(k), you must have adopted the plan by October 1, 2022.

If you have a traditional 401(k) and you’d like to amend your plan into a safe harbor plan, you have until:

  • December 2, 2020 – the deadline has passed for converting to a safe harbor match for 2021.
  • December 2, 2021 – there is still time to convert if you plan to make 3% nonelective contributions.
  • December 31, 2022 – a traditional 401(k) can be converted to a 4% nonelective safe harbor for 2021.

Contact Ubiquity to see how easy and inexpensive small business 401(k)s can be. We offer free Safe Harbor 401(k) consultations to help you decide if a plan amendment or new Safe Harbor is right for your business. Since 1999, our company has been one of the few 401(k) plan administrators to offer our services for a consistently affordable, flat monthly fee.

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San Francisco, CA 94104
Support: 855.401.4357

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
Do not sell my info
44 Montgomery Street, Suite 300
San Francisco, CA 94104
Support: 855.401.4357

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