What’s a safe harbor 401(k) plan and how is it different?

Haven’t heard this term before? Don’t let it intimidate you. Safe harbor is just a type of 401(k) plan that offers benefits for meeting a few requirements. It’s a popular solution for business owners who want to reduce their administrative burden.

Safe harbor 401(k) plans have a simpler plan design that allows you to bypass some of the annual compliance testing required by the *. In return, you must make a minimum safe harbor contribution to the plan. The most common form of contribution is a match, meaning the business owner is only responsible for making a contribution when the employee does so. Employees benefit by getting “free money” in the form of the matching contribution, which incentivizes them to save more. They’re also immediately vested in the plan.

Non-safe harbor 401(k) plans typically don’t require you to make a minimum matching contribution. But they’re subject to more compliance testing—which means more administrative paperwork and potential hassle if a correction is needed.

So, what’s plan compliance testing? The IRS requires a series of annual tests to ensure that qualified retirement plans are “in compliance”—in other words, that they follow the applicable laws and plan provisions, and are fair to all participants. Safe harbor plans are automatically deemed to pass non-discrimination compliance tests, which are tests to ensure the plan doesn’t provide a more significant benefit to highly compensated employees (those who earn at least $130,000 per year or who own more than 5% of the company).

The Simply Retirement by Principal® safe harbor 401(k) plan is designed to help you save time with this process. The Ubiquity Retirement + Savings® recordkeeping compliance system is fully automated—we just need you to answer some questions each year. From there, we automatically crunch the numbers and create the necessary forms for you to submit to the IRS, all on our site.


Two contribution choices are available with a *.

Employee contribution example

Business owner matching contribution example

Stretch the match

Match 100% of the employee’s contribution up to the first 3% of pay, then match 50% of the next 2% of pay, *.

Employee contribution example

5% of pay
$1,750

Business owner matching contribution example

3% + .5% + .5% (equal to 4%) of employee pay
$1,400

Straight match

Match 100% of the employee’s contribution up to *.

Employee contribution example

4% of pay
$1,400

Business owner matching contribution example

4% of employee pay
$1,400

Example is based on an employee with an annual salary of $35,000 contributing at the highest percentage to maximize the match.

Are there special deadlines for safe harbor 401(k) plans? In a word, yes. If you’re starting a brand-new safe harbor 401(k) plan and want to have it take effect in the current calendar year, your plan must be fully set up and active by October 1, 2020. Setting up the plan and taking care of all the related administrative tasks can take some time, so consider finalizing your plan by September 25, 2020, to meet this date.

Intended for financial professional and plan sponsor use.

*IRS:Eligible employees must be notified prior to plan start date.

Information is intended to be educational in nature and is not intended to be taken as a recommendation.

*$19,500: As indexed by the IRS for the 2020 calendar year. For purposes of maximum contributions, compensation is limited to $285,000, as indexed, per participant per year.

Information is intended to be educational in nature and is not intended to be taken as a recommendation.

*Safe harbor plan: Deferrals and required business owner contribution and optional additional profit sharing contributions cannot exceed the lesser of 100% of pay or $57,000 per participant. Total business owner contribution to plan cannot exceed 25% of total eligible compensation (2020 tax year, as indexed). Enhanced matching options also available.

Information is intended to be educational in nature and is not intended to be taken as a recommendation.

*up to 5%:Employees are 100% vested in required business owner contribution.

Information is intended to be educational in nature and is not intended to be taken as a recommendation.

*4% of pay:Employees are 100% vested in required business owner contribution.

Information is intended to be educational in nature and is not intended to be taken as a recommendation.

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