A Safe Harbor 401(k) plan is a type of 401(k) retirement plan that allows small business owners to avoid an IRS nondiscrimination test that sometimes prevents the owner from maxing out his or her 401(k), which happens when there are low amounts of contributions by employees and a high amount of contributions by the owners. In order to qualify as a Safe Harbor plan, a 401(k) plan must meet certain criteria.
For example, in a traditional 401(k) plan you're not required to make contributions for your employees. But with a Safe Harbor plan, you must make a fully vested contribution for your employees. You can make a contribution of 3% (or more) of pay on behalf of each eligible employee even if they aren't actively contributing, or you can match only employees who contributed to the plan, dollar for dollar up to 3% of that employee's pay, and then match contributions from 3% to 5% at a 50% rate. You could do a higher match but it can’t be less than this.
Safe Harbor contributions are generally subject to the same withdrawal rules that apply to employee 401(k) deferrals - that is, payouts are only allowed upon termination of employment, disability, death, hardship, or after age 59½.
A long vesting schedule is not allowed with Safe Harbor plans, so contributions are fully vested when made. This means that when employees leave or are even fired, at any time, all the matching contributions made by the employer belong to that ex-employee.
A Safe Harbor plan is simpler and less expensive for employers to maintain because it avoids all the complicated testing requirements that normally apply to traditional 401(k) plans.
You don't have to use the Safe Harbor rules every year. But for any year you don’t, you must provide a notice to employees at least 30 days before the plan year starts.
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