9 Essential Questions About Safe Harbor 401(k) Plans

9 Essential Questions About Safe Harbor 401(k) Plans

If you’re a business owner trying to save more in your 401(k), you might be hitting a wall. Even though the IRS says you can contribute over $23,500 in 2025 ($31,000 if you’re over 50 years old), you might be stuck at a much lower number. Why? Because your ability to save more depends on how much your employees are saving.
 
That’s where a safe harbor 401(k) can help.

What Is a Safe Harbor?

Think of a safe harbor like a calm bay for your retirement plan. It protects your 401(k) from rough waters—specifically, compliance testing.

Compliance testing checks if your plan is “fair” and is meant to ensure balance. If owners and high earners are saving way more than everyone else, your plan could fail the test. A safe harbor plan helps you pass automatically by giving all employees a minimum contribution, either a guaranteed contribution or a match to each employee’s contribution.

What Is Compliance Testing?

Every 401(k) plan has to pass tests to make sure it’s not just helping the top earners. These tests compare how much owners and high-paid employees save versus everyone else.

If your plan fails, you may have to refund money to HCEs or make extra contributions to employees. That’s time-consuming and expensive.

What Is a Top-Heavy Plan?

A plan is considered “top-heavy” if 60% or more of the money in it belongs to owners or HCEs. That’s a red flag for the IRS. And yes—family members of owners count too! If your plan is top-heavy, you may be required to make extra contributions to employees, even if you didn’t plan to.

What Are the Benefits of a Safe Harbor?

A safe harbor plan can significantly reduce the administrative burden of compliance testing. It also creates another tax-reducing expense that can help you manage your business taxes. Plus, a more robust 401(k) is a useful recruitment and retention tool.

For owners of a highly profitable business, they’re able to maximize their 401(k) contributions, transferring more of their earnings and profit into retirement savings. A safe harbor also gives them flexibility to decide how much to contribute to their 401(k) each year verses bumping against a ceiling created by an underutilized plan.

What Are the Risks of a Safe Harbor?

Your company is contributing more to employee 401(k) savings, which can be expensive. If your company’s revenue is volatile, it may be hard to make contributions each year.

Employer contributions are also fully vested right away, which means you can’t get those dollars back if employee performance falls short of expectations.

When Should I Consider a Safe Harbor Contribution?

Here are four scenarios that can help give you a sense of whether adding a safe harbor feature makes sense for your company.

• Owners and highly compensated employees are not able to maximize their 401(k) savings without risking a failed compliance test.
• Your 401(k) plan has recently failed at least one compliance test.
• You have been forced to make employer contributions in the past.
• Many non-highly compensated employees don’t contribute to your 401(k) plan.

What’s an Example of a Safe Harbor in Action?

Consider the following scenario. Three 50-year-old partners at a law firm with 10 employees can only contribute $5,000 per owner per year to their company’s 401(k) plan because non-partner employees contribute little or nothing to the plan. The partners want to begin saving $31,000 each per year—a total increase of $75,000 per year. How can they do it?

By adding a non-elective safe harbor, they were able to contribute six times more, avoid failing compliance testing, and the team is happy about the increased benefits across the board. Download the full case study below.

Is a Safe Harbor Right for Me?

Let’s talk about it. Contact us to run through your options for adding a safe harbor option to your current plan. You may find it’s a win-win-win for you, your employees, and your company.