A Publication of WTVP

If you are an employer who has or is considering establishing a 401(k) plan, one of your key decisions is whether it should be a safe harbor 401(k) plan. In a safe harbor 401(k) plan, the annual discrimination tests that apply to employee deferrals (Average Deferral Percentage, or ADP) and employer matching contributions (Average Contribution Percentage, or ACP) are deemed satisfied.

For employers who have difficulty passing the test and must limit the amount their highly-compensated employees may contribute, a safe harbor 401(k) plan may be the answer. On the other hand, a safe harbor plan allowing highly-compensated employees to maximize their deferrals—$15,500 for 2008—means that there is a required contribution to the non-highly-compensated employees. There are also annual notice requirements for participants and withdrawal restrictions.

Safe Harbor Requirements

A safe harbor 401(k) plan requires that the employer make either a three percent of compensation contribution to all participants or a minimum four percent matching contribution to participants who are deferring. The participants cannot be required to meet any specific conditions to receive the safe harbor contribution, such as year-end employment or a certain number of hours worked.

The safe harbor contribution must be 100 percent immediately vested and subject to withdrawal restrictions similar to the 401(k) contributions. In addition, a detailed annual notice must be given to all participants at no less than 30 days and no more than 90 days before the beginning of each plan year informing the participants that the plan is intended to be a safe harbor plan.

Top-Heavy Considerations

A key area to look at when considering a safe harbor plan is whether your 401(k) plan is top-heavy. A non-safe harbor 401(k) plan that is top-heavy may require a three percent minimum top-heavy contribution to non-key employees if any key employee is deferring to the plan. The safe harbor contribution can do double-duty by being counted toward satisfying not only the safe harbor contribution requirement, but also the top-heavy contribution requirement.

A safe harbor 401(k) plan, whether actually top-heavy or not, is “deemed” not if no other contributions, other than the deferrals and safe harbor contributions, and forfeitures are made to the plan. This “deemed” top-heavy rule is determined each plan year. So if you are already making top-heavy minimum contributions to a 401(k) plan by adding the safe harbor 401(k) feature, you may not be exposing the company to any additional contributions.
If your 401(k) plan has no problem passing the nondiscrimination test because all or most of your non-highly-compensated employees participate and make deferrals sufficient to support the amounts highly-compensated employees want to contribute, and your plan is not top-heavy, a safe harbor 401(k) plan may not be in the company’s best interest. By not making your plan a safe harbor 401(k), you may reduce the amount of required contributions.

A safe harbor 401(k) plan provides the opportunity to avoid the problems of limiting contributions by the highly-compensated employees due to the nondiscrimination test. Adding the safe harbor feature to a plan where top-heavy minimum contributions are already being made may add little or no additional expense to the company.


To be or not to be a safe harbor 401(k) plan could depend on the answers to the following questions.

Safe harbor 401(k) plans are currently one of the most popular plan designs for small employers. The fundamental question of whether your 401(k) plan should be a safe harbor 401(k) plan should be based on your goals. Safe harbor 401(k) plans are great for some employers, but other employers would do better without them. Consult with your plan advisor to determine if a safe harbor 401(k) is right for you. IBI