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What is a Safe Harbor 401(k) Plan?

Your plan might need an extra compliance boost
through a safe harbor plan.

The Safe Harbor 401(k) plan is a way for employers to bypass IRS non-discrimination tests. Employers can essentially exempt themselves from red tape by making specific 401(k) contributions on behalf of employees. You can think of it as giving eligible employees an immediate pay raise or company match in exchange for fewer compliance headaches.

Learn more about Safe Harbor 401(k) Plans

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    Boost Enrollment

    Learn how high participation and savings rates can help you pass IRS nondiscrimination tests.

    Learn More
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    Safe Harbor 101

    An introductory handbook to safe harbor plans, how they work, and if they’re right for you.

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    IRS Test Basics

    Dive into the IRS top heavy test and identify the key employees in your company.

    Learn More

Safe Harbor Alternative:
How to Avoid this Costly Option

Why Safe Harbor Plans Exist

Safe harbor plans exist for employers to avoid annual IRS nondiscrimination tests. The IRS uses these tests to determine whether a company’s 401(k) plan didn’t discriminate in favor of highly compensated employees (the highest earners in the company). When the IRS set up the rules for 401(k) plans, it wanted to make sure that the program helped everyone save money for retirement. The government didn’t want a situation where bosses were able to shelter lots of money from taxes while ordinary employees received no benefits at all. This policy worked great for almost everyone, unless you were a small business owner trying to keep costs low.

Illustration of measuring tools and a lightbulb
Illustration of measuring tools and a lightbulb

How the IRS Nondiscrimination Tests Work

The IRS nondiscrimination tests (the ADP and ACP) compare the contributions or savings rates of one group of employees to the other. The IRS runs the test to determine whether employees across the company, regardless of how much they make, are saving at roughly equal rates or total dollar amounts. What the IRS doesn't want to see are highly compensated employees (HCEs) 401(k) contributions making up more than 70% of the total plan assets.

Challenges of Safe Harbor Plans

The tough part about a safe harbor plan is it’s expensive. Often the cost of safe harbor 401(k) contributions can mean not offering a 401(k) at all.

Because of this a lot of business owners decide not to offer a retirement plan at all, rather than be locked into something that is not affordable. Unfortunately, IRS policies don’t seem to take into account the ever-changing financial state that small businesses are in as they establish themselves. Employees want to work for a company that offers a retirement plan. Owners need to save for their own retirements.

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Safe Harbor Alternative

The alternative: Design a plan that works for your workers. There are ways other than a safe harbor 401(k) plan to meet the IRS nondiscrimination requirements. Your alternative is to get a 401(k) plan that is very good at getting people to use the plan, and helps people save at high rates. It’s cheaper for you, and good for your employees. The keys to getting high participation and savings rates means getting a 401(k) plan built with lots of automation that’s accessible on mobile devices. Again, this will help give you what you need to skip safe harbor contributions and still pass nondiscrimination testing. And it will give your employees a benefit that works for their financial futures.

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