What is a Safe Harbor 401(k)?

What is a Safe Harbor 401(k) plan?

A Safe Harbor 401(k) is a retirement plan designed to help business owners and highly compensated employees maximize their own contributions without the restrictions of traditional 401(k) testing. In exchange, employers must make required "safe harbor" contributions to eligible employees through either matching or nonelective contributions.

This plan is especially well-suited for businesses that want to offer a competitive retirement benefit, avoid complex compliance testing and ensure equitable contributions across their workforce. It allows for both employee salary deferrals and employer contributions, with higher limits than IRAs.

Business eligibility

Any for-profit or nonprofit business can establish a Safe Harbor 401(k). There are no size restrictions. The employer must be willing to make mandatory annual contributions, and the plan must be offered to all eligible employees.

Employee eligibility

Employers may choose more lenient criteria, but the maximum eligibility requirements are:

• Age: 21 or older, and
• Service: One year of service with at least 1,000 hours or two consecutive years of service with at least 500 hours

Who contributes to a Safe Harbor 401(k)?

Both employees and employers contribute to a Safe Harbor 401(k). In most cases, employer contributions must be immediately 100% vested. Depending on plan design, employees may receive employer contributions or make salary deferrals on a traditional or Roth basis:

• Traditional: Contributions are excluded from income, grow tax deferred and are taxed as ordinary income when distributed.
• Roth: Contributions are taxed as regular income, grow tax free, and qualified distributions are tax-free.

Employee contributions

Employees may defer up to 100% of compensation, subject to annual limits. Catch-up contributions are available for those age 50+, and beginning in 2025, enhanced catch-up limits may apply for individuals aged 60–63.

See Annual limits page for current thresholds.

Employer contributions

Employer contributions are tax-deductible to the business. Employers must choose one of two required contribution methods:

• Matching: 100% of the first 3% of compensation deferred, plus 50% of the next 2%
• Nonelective: 3% of compensation for all eligible employees, regardless of their level of salary deferrals

Distributions, RMDs and plan loans

Distributions follow 401(k) rules. Withdrawals made before age 59½ may be subject to a 10% penalty unless an exception applies.

If you elected to save in a Roth account, you will not have required minimum distributions (RMDs) as the original owner. Otherwise, you must generally begin taking required minimum distributions by April 1 the year after you turn 73. Current employees who own less than 5% of the company may be able to delay RMDs from that employer's retirement plan past this deadline as long as they continue working for the employer.

Participant loans are permitted, subject to plan rules.

Safe Harbor 401(k) deadlines

The plan must be established by Oct. 1 of the current plan year to make contributions. Salary deferrals must be deposited no later than 15 business days after the end of the month in which they were withheld. Employer Contributions are due by the business’s tax-filing deadline, including extensions.

Key characteristics summary

Choosing a Safe Harbor 401(k) plan

To compare Safe Harbor 401(k)s with other retirement plan types, visit Workplace retirement plans for business owners.

How Edward Jones can help

A Safe Harbor 401(k) can help you attract and retain employees while maximizing your own retirement savings. An Edward Jones financial advisor can help you evaluate whether this plan fits your goals and guide you through setup, funding and investment decisions.