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

Want to start a new Safe Harbor 401(k) plan or add a Safe Harbor feature to your existing plan? Here are the deadlines you need to know.

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A Safe Harbor 401(k) exempts employers from the Actual Deferral Percentage (ADP) test that could limit the retirement contributions of owners, family members of owners, and Highly Compensated Employees (HCEs) earning $130,000 or more. Thanks to the SECURE Act established in 2020, employers have more time to decide whether this option is one they’d like to add to an existing 401(k) plan.

Safe Harbor 401(k) Set Up Prior to December 2, 2021

  • The first year of the plan must include 3% salary nonelective contributions, rather than matching.
  • Once established, this plan amendment can be adopted for 2021 as late as December 1, 2022.

Safe Harbor 401(k) Set Up on December 2, 2021, or Later

  • The first year of the plan must include 4% salary nonelective contributions, rather than matching.
  • Once established, this plan amendment can be adopted for 2021 as late as December 31, 2022.

When Are Mid-Year Safe Harbor Changes Allowed?

IRS Notice 2016-16 permits businesses to change or implement Safe Harbor plans mid-year as long as:

  • The plan is not a successor plan.
  • All eligible employees are included, without discrimination, and fully vested.
  • The employer agrees to make nonelective contributions for the first plan year if there is short notice.

If you are considering modifying a Safe Harbor 401(k) plan for your small business this year, keep in mind employers are always allowed to increase future nonelective contributions from 3 to 4%, add an age 59.5 withdrawal feature, shift the plan entry date from monthly to quarterly, change default investment funds, and alter the dispute resolution rules.

Generally speaking, employees are entitled to receive 30-90 days’ notice of fundamental changes to the plan, so they have enough time to adapt their investment strategy if necessary. Employers who are operating at an economic loss or who provide notice prior to the start of the plan year can receive special exemptions to reduce or suspend contributions mid-year as needed.

When Are Mid-Year Safe Harbor Changes NOT Allowed?

The IRS does not allow certain types of Safe Harbor changes mid-year, such as:

  • The number of years an employee must work before receiving employer contributions.
  • The type of Safe Harbor plan, whether traditional or QACA.
  • Switches from nonelective contribution to discretionary matching.
  • The match formula (unless there is at least three months’ notice prior to the end of the plan year).

When Can I Start a New Safe Harbor 401(k) Plan?

If you’re an employer who does not have an existing 401(k) plan, but the Safe Harbor provision is one you know you’re interested in adding, then the following dates apply to your situation:

  • Prior to October 1, 2021
    Employee salary deferral contributions are permitted from October 1st through December 31st. Employers can choose to make a 3% nonelective contribution or a 4% match.
  • October 1 – December 2, 2021
    Employers can make a Safe Harbor nonelective contribution only, which must be equal to at least 3% of all eligible employees’ salaries during the initial plan year.
  • December 2, 2021 or Later
    Employers can make a Safe Harbor nonelective contribution only, which must be equal to at least 4% of all eligible employees’ salaries during the initial plan year.

Sometimes employers take a wait-and-see approach to Safe Harbor contributions. If they are likely to pass the ADP test, they’ll keep the standard plan. If it looks like failure is imminent, they’ll adopt the Safe Harbor provision mid-year.

Set Up Your Safe Harbor 401(k) With Ubiquity

Since 1999, Ubiquity has provided quick and easy setup and administration for small business 401(k)s. Our affordable, flat-fee model means that costs never go up if your assets under management grow or the number of plan participants increases. As a full-service Safe Harbor 401(k) plan administrator specifically geared toward small businesses, we offer dedicated support and guidance for both employers and employees. Contact us for a free Safe Harbor consultation to discover how easy it can be to start saving for your future and offer employees competitive retirement benefits with an employer match or non-elective contribution.

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44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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© 2021 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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