Safe Harbor
Case Study for
Business Owners
How three partners can increase their annual 401(k) contributions by 6x
Increase in annual 401(k) contributions by +$82,500
Situation
- Three partner/owners of a law firm who are over 50 years old.
- Own a firm with ten employees.
- Practice has a traditional 401(k) with no employer contribution.
- Non-partner employees contribute little to no funds into their retirement.
- The owners’ 401(k) contributions are limited to $5,000 annually per owner.
- The partners want to maximize their personal contributions up to the $32,500 maximum.
Possible Benefits
- Increases contribution from $5,000 to $32,500 for each partner.
- Passes compliance testing.
- No corrective distributions to
the partners.
Challenge
Consider three partners of a successful law firm, all are 50+ years old.
The firm sponsors a 401(k) plan for the partners, and their ten employees. 1
The 401(k) plan doesn’t have much uptake among the rank-and-file
employees, most contribute little to no funds into the plan. This makes
it very difficult for the partners to contribute to the plan and still pass
annual compliance testing. As a result, the three partners are only able to
contribute ~$5,000 each per year into their retirement accounts. In years
when they contribute more, they receive corrective distributions from the
plan, causing major administrative and tax headaches.
The objective of all three partners is well-defined. They seek to maximize
their personal annual contributions to the plan, and enjoy the tax benefits
of the retirement plan.
Objective
The firm offers a 401(k) plan to their employees, which the partners participate in. However, due to low participation among the rank-and-file employees, the partners aren’t able to maximize their contribution, or their tax benefits in the plan. All three partners have very clear near-term objectives:
- Maximize their annual personal contributions in the 401(k) plan
- Enjoy the tax advantages of their 401(k) plan
- Avoid failed compliance testing and corrective distributions
Solution
The firm consults with Fisher\SMB, who teaches them about how adding a Safe Harbor component to their existing plan could help them achieve their objectives.
Adding a Safe Harbor component automatically deems the plan to pass compliance testing and eliminates the need for corrective distributions.
It also enables each partner to maximize their annual contribution to their retirement accounts. Their total allowable contribution jumps from $5,000 to $32,500 each per year2. A 6x improvement over their prior contribution limit!
Results
- $27.5K savings increase per partner.
- $195K per partner retirement savings over 6 years.
- Increases contribution from $5,000 to $32,500 for each partner.
- Passes annual compliance testing.
- No corrective distributions to the partners.
In Summary:
Adding a Safe Harbor component to the existing 401(k) allows each partner to maximize their annual personal contributions to the plan, without worrying about corrective distributions or failed testing.
Compliance testing
Annual compliance testing is required for all 401(k) plans. These tests confirm that highly compensated employees (anybody making over $160,000/year for 2026, or a 5%+ owner of the company) do not receive a significantly higher benefit than non-highly compensated employees.
If a plan fails compliance testing, the company may be required to make non-elective employer contributions to eligible employees. Sometimes, highly compensated employees may be subject to corrective distributions, which can be costly, and an administrative burden.
Tax-Advantaged Retirement Plan Contributions
- Owners: 3
- Total Employees: 10
- Owner Goal: Maximize Personal Plan Contributions
|
Before (without Safe Harbor)
|
After (with Safe Harbor)
|
|
|---|---|---|
|
Can owners contribute maximum contributions amount to $32,500annually
|
No
|
Yes
|
|
Are owners making Safe Harbor contributions to employees?
|
No
|
Yes
|
|
Does plan pass compliance testing?
|
No
|
Yes
|
|
Does plan make corrective distributions to owners?
|
Yes
|
No
|
Are you a fit for Safe Harbor?
|
Better Fit
|
Poorer Fit
|
|
|---|---|---|
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Are owners currently able to maximize their personal contributions in the plan?
|
No
|
Yes
|
|
Has the plan ever had corrective distributions or failed compliance testing?
|
Yes
|
No
|
|
Employee count
|
Less than 75
|
More than 74
|
|
Is the employer willing to provide an employer contribution of ~3% to employees?
|
Yes
|
No
|
Safe Harbor benefits and risks
Benefits
- Enables plans to automatically pass compliance testing, allowing owners to maximize their salary deferral
- Employer contribution is a tax-reducing business expense
- Offers flexible contribution options
Risks
- Can be expensive because it requires the employer to provide an annual contribution to eligible employees
- Employer contributions are fully vested immediately
Give us 15-minutes
We’ll consult on an actionable plan to help owners and 401(k) plan participants contribute the maximum personal deferral to their retirement plan. Up to $24,500 per year, or $32,500 if over age 50. It could be the most profitable 15-minutes you spend all year.
- 1This case is reflective of a specific client experience and is not representative of all clients’ experience. Fisher\SMB makes no guarantee that the same results will be achieved. Testimonials are representative of client views at the time collected. Clients are not compensated financially or otherwise for testimonials. There are no known material conflicts of interest between the client and Fisher\SMB that could influence the testimonial content.
- 2This is based on three business owners who are over 50 years old maximizing their contribution for 2026 including a catch-up contribution. Savings are tax-deferred until withdrawn in retirement. Safe Harbor isn’t a good fit for every business. Consult with a professional to help determine if the benefits of a Safe Harbor outweigh the costs for your specific business.
More Helpful Resources
Safe Harbor & Tax Savings
Safe Harbor 401(k) for Business Owners
What you need to know about starting a Safe Harbor 401(k) for your business, all in one helpful page.
9 Essential Questions About Safe Harbor 401(k) Plans
Discover how Safe Harbor 401(k) plans help business owners avoid compliance testing, maximize contributions, and support employee savings.
The Keys to 401(k) Compliance Testing
Simple tips to pass your 401(k) compliance test, avoid penalties, and support fair retirement savings. Learn about HCEs, Safe Harbor plans, and key deadlines