Safe Harbor FAQs

What is Safe Harbor?

Safe harbor is a type of employer contribution in a 401(k) plan that, when enabled, deems the plan to automatically pass most annual compliance testing.

How Does a Safe Harbor 401(k) Plan Work?

A safe harbor 401(k) is a 401(k) plan with a required annual employer contribution. The employer makes a contribution to employee accounts that is typically immediately vested. In exchange, the plan automatically passes most compliance testing, which allows high earners to maximize their personal contribution to the plan.

What Are the Types of Safe Harbor?

There are 3 main types of safe harbor formulas:

1. Non-Elective Safe Harbor: Employees get an annual employer contribution of 3% of their salary regardless of whether they contribute to the plan.
2. Basic Safe Harbor Match: The employer matches 100% of the first 3% of each employee’s contribution and 50% of the next 2%.
3. Enhanced Safe Harbor Match: The employer matches 100% of the first 4% of each employee’s contribution.

What Are the Advantages of Safe Harbor?

Including safe harbor as part of a company 401(k) plan can have the following benefits:

1. Safe harbor helps the plan automatically pass most annual compliance testing
2. Passing compliance testing enables high earners to maximize their personal contribution to the plan
3. Safe harbor can provide a great incentive for employees to save for retirement, especially if a matching formula is utilized

Should I Consider Safe Harbor?

If your plan has had trouble passing compliance testing in the past, or if high earners in your plan have received corrective distributions, then a safe harbor provision may be the right fit for your plan. There are pros and cons to consider, as well as deadlines to be aware of when it comes to adding safe harbor to your 401(k) plan. Fisher Investments specializes in small business retirement plans, and can help you navigate safe harbor—contact us today.