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Safe Harbor 401(k): the 2021 guide for business owners
401(k) Finances

Safe Harbor 401(k): the 2021 guide for business owners

Nicolle Willson, J.D., CFP®, C(k)P®

What is a Safe Harbor 401(k) plan? What do you have to do to offer one? And what do all those acronyms mean?

Don't worry. We’ve helped many companies set up compliant 401(k) plans, and we can walk you through all the basics. This guide explains everything from the different 401(k) compliance tests to what you’ll need to do to set up a Safe Harbor plan. It’s a little involved, though, so let’s start with some background information.

You probably already know that offering a 401(k) makes it easier for employees at your company to save more for retirement. But the government wants to make sure that everyone — not just highly compensated employees — gets to participate in a meaningful way. The goal of 401(k) plans, after all, is to prepare more people for retirement, not to create a tax break that’s exclusively for business owners and executives.

To make sure everyone has a chance to benefit from the plan their employer offers, the IRS has set up a series of what it calls “nondiscrimination” tests that are designed to measure whether a 401(k) plan unduly favors highly compensated employees. If your plan were to fail one of these tests, it could mean making expensive corrections, a lot of administrative work, and potentially even refunding 401(k) contributions.

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So, what’s a Safe Harbor 401(k) plan?

A Safe Harbor plan is a special kind of 401(k) that automatically satisfies most nondiscrimination testing. It has certain built-in elements that are intended to help employees save by requiring companies to contribute to their employees’ 401(k) accounts. When employers take this step to encourage more employees to participate, the IRS offers them “safe harbor” from both the nondiscrimination testing process and the consequences of failure.

If you’re thinking about offering a Safe Harbor 401(k), here’s what you need to know. Feel free to jump ahead if you’re trying to answer a specific question:

Ready? Okay, let’s dive in.

What are nondiscrimination tests, and how do they affect your 401(k) plan?

There are three main types of nondiscrimination tests required by the IRS to help ensure that 401(k) plans benefit both owners and employees. Two of these tests compare how highly compensated employees (HCEs) and all other employees use your company’s 401(k):

The Actual Deferral Percentage (ADP) test measures how much income your HCEs contribute to their 401(k), compared to rank and file employees.
The Actual Contribution Percentage (ACP) test is similar, but it compares employer contributions to HCEs with everyone else.

A third test, the Top-Heavy test, looks at individuals the IRS defines as “key employees” and measures the value of the assets in their 401(k) accounts, compared to all assets held in the 401(k) plan. To get a detailed look at all these definitions, how the tests are applied, and see examples, check out our overview of the three 401(k) nondiscrimination tests.


If your plan fails any of these tests, you’ll have to deal with some administrative hassle, potentially expensive corrections, and the possibility of refunding 401(k) contributions. A Safe Harbor 401(k) can generally help you avoid the uncertainty surrounding annual testing.*

Setting up a Safe Harbor 401(k) plan

Does passing these tests seem like a bit of a pain? If so, then a Safe Harbor 401(k) that's generally available to all employees might be a better way to go depending on your specific circumstances.

Safe Harbor plans require that you contribute to your employees retirement 401(k) accounts in one of two forms: a match or a nonelective contribution. This requirement is important because it can help increase savings. According to the Economic Policy Institute (EPI), close to half of all American families don’t have any retirement savings, and among families nearing retirement, the median savings is only $17,000.

In exchange for letting your plan automatically satisfy most nondiscrimination testing, you’ll have to follow some rules to make sure your plan benefits all your company’s employees.

If these requirements are at all confusing, we’d be happy to help. Schedule a quick consult to get hands-on help setting up your 401(k).

Requirements for a Safe Harbor 401(k)

The main requirement for a traditional Safe Harbor 401(k) is that the employer must make contributions, and those contributions must vest immediately. Contributions can take three different forms, the first two of which are matching, which means employees must defer funds to their accounts in order to receive contributions. The third option requires your company to make a contribution, even if employees don’t defer any of their income into their plan.

Here are examples of the different contribution formulas:

1. Basic matching: The company matches 100% of all employee 401(k) contributions, up to 3% of their compensation, plus a 50% match of the next 2% of their compensation

2. Enhanced matching: The company matches at least 100% of all employee 401(k) contributions, up to 4% of their compensation (not to exceed 6% of compensation)

3. Non-elective contribution: The company contributes at least 3% of each employee’s compensation, regardless of whether employees make contributions

This is what the matching and nonelective contributions would look like for an employee under the three different Safe Harbor formulas. The employee in this case earned $150,000 of eligible compensation during the year.

Safe-Harbor-401k-Matching-Formulas

Note that these contributions are only the minimums. For example, a more generous employer can match up to 6% of employees’ pay, and it could still qualify as Safe Harbor.

Right way to 401(k)

Safe Harbor contribution limits

In 2021, the basic employee deferral limits for a Safe Harbor plan are the same as any employer-sponsored 401(k): $19,500 per year for participants under age 50, and $26,000 when you include catch-up contributions for employees over age 50 or older.

As an added benefit, with Safe Harbor provisions in place and less to to worry about when it comes to nondiscrimination testing, owners and highly compensated employees can truly max out their deferrals. That means they can take full advantage of their contribution limits.

Additional Safe Harbor requirements

Making contributions to your employees’ 401(k) is the most notable Safe Harbor requirement, but there are additional rules surrounding when and how you offer your plan.

Safe Harbor deadlines
For new plans, October 1 is the final deadline for starting a new Safe Harbor 401(k). But don’t wait until a few days before the deadline to set up your plan, because if you’re making a matching contribution, you’re also required to notify your employees 30 days before the plan starts, and it can take a week or more to set up your plan. So, make sure you talk to your 401(k) plan provider well before September 1. For existing plans, the deadlines depend on the type of Safe Harbor contribution you are adding to the plan and are detailed below.

Important dates for new plans:

  • August 20, 2021: Deadline for setting up your Guideline Safe Harbor 401(k) Plan for the current year.
  • September 1, 2021: 30-day notice must be sent to employees
  • October 1, 2021: Safe Harbor 401(k) Plan is effective and exempt from most nondiscrimination testing for 2021.

It is important to be aware that if a Safe Harbor feature is added to a new plan, it must be in place for the entire plan year. If the plan year is set up retroactive to January 1, contributions will be required based on eligible compensation for the entire year.

Important dates for existing plans-Safe Harbor match

  • November 20, 2021: Deadline for requesting the addition of a Safe Harbor matching provision to your 401(k) plan with Guideline for the following year
  • December 1, 2021: 30 day notice must be sent to employees
  • January 1, 2022: Safe Harbor provision takes effect for 2022

If you want to add a Safe Harbor matching provision to an existing 401(k), your administrator can make a plan amendment that goes into effect January 1 of any future year. Remember, there is an employee 30-day notice requirement, and it may take some time for your administrator to amend the plan, so try to get this taken care of by the end of November to go into effect January 1. (At Guideline, November 21, 2021 is your last day to add Safe Harbor matching provisions to your 401(k) to take effect 2022.)

Important dates for existing plans-Safe Harbor nonelective contributions

  • November 30, 2021: Deadline for adopting the addition of a 3% Safe Harbor Nonelective provision to your 401(k) plan with Guideline for the 2021 year (request the amendment by November 5, 2021)
  • December 31, 2021: Deadline for adopting the addition of a 4% Safe Harbor Nonelective provision to your 401(k) plan with Guideline for the 2021 year (request the amendment by December 9, 2022)

If you want to add a Safe Harbor nonelective provision to an existing 401(k) to take advantage of Safe Harbor status for the year, you may do so at any time before December 1st, so long as you are willing to pay the minimum 3% contribution for the entire plan year. After December 1st, you can still add a Safe Harbor nonelective contribution for the year in question, up to the deadline of December 31st of the following year, so long as you increase the contribution to 4%. (Note: The new nonelective rule was passed by Congress in late 2019 under the SECURE Act and gives more flexibility for those plans who didn’t know they were going to fail nondiscrimination testing and would like to rectify.)

Employee notice requirements
Each eligible employee must be notified in writing about their rights and obligations under the plan annually if the plan includes matching or automatic enrollment features. Notice must be given within a reasonable amount of time — at least 30, but not more than 90 days — before the beginning of the plan year.

Making mid-year changes to a Safe Harbor plan
If you already offer a Safe Harbor 401(k) plan but would like to make changes, there are special rules that you need to follow and a few changes that are simply not allowed. The details for mid-year changes are included in IRS Notice 2016-16. ( Note that the notice requirement for nonelective safe harbor plans that do not have a matching provision no longer apply).If the Safe Harbor plan has a match and you want to make changes, you must give employees an updated Safe Harbor notice that describes any changes. Notice should be given 30 to 90 days before the changes go into effect and provide employees at least 30 days to change their cash or deferral election. Safe Harbors plans can’t change the type of Safe Harbor (change from a match to a nonelective, for example) mid-year and generally cannot reduce benefits under the plan.

Once you’ve satisfied the notice rules above, if applicable, you may be able to make changes to certain aspects of the plan including, for example, increasing future Safe Harbor nonelective contributions from 3% to 4%, or changing the plan entry date for eligible employees from quarterly to monthly.

Several types of changes are not permissible during the year, however, so review the rules carefully if you wish to amend your plan.

If you already offer a Safe Harbor 401(k) plan but would like to make changes, there are special rules that you need to follow. All the details for mid-year changes are included in IRS Notice 2016-16, but these are the basic things the IRS requires:

  • Give employees an updated Safe Harbor notice that describes any changes. Notice should be given 30 to 90 days before the changes go into effect.
  • Give each notified employee at least 30 days to change their cash or deferral election.
  • A combined notice may be provided.

Once you’ve satisfied the notice rules above, you may be able to make changes to certain aspects of the plan including, for example, increasing future safe harbor non-elective contributions from 3% to 4%, or changing the plan entry date for eligible employees from quarterly to monthly.

Several types of changes are not permissible during the year, however, so review the rules carefully if you wish to amend your plan.

Is a Safe Harbor 401(k) plan right for my company?

Good question! In general, Safe Harbor plans are a good choice for companies that do any of the following:

  • Plan to match employee contributions anyway
  • Worry about passing nondiscrimination testing
  • Fail the ADP, ACP, or Top-Heavy tests
  • Have low participation among NHCEs and non-key employees
  • Care deeply for the wellbeing of their employees

In terms of pros and cons, the biggest downside to offering a Safe Harbor plan is the cost of the contributions your company will make. It's possible they could increase your overall payroll by 3% or more if all employees participate.

But many companies think the upside more than outweighs the cost. Offering a Safe Harbor 401(k) plan can result in happier employees, tax savings, and greater certainty that your plan won’t fail nondiscrimination tests.

Talk to a 401(k) Specialist

This content is for informational purposes only and is not intended to be construed as tax advice. You should consult a tax professional to determine the best tax advantaged retirement plan for you.

*Safe Harbor 401(k) plans generally automatically satisfy Top Heavy requirements, except for plan years in which the employer makes discretionary contributions (such as profit sharing contributions) in addition to Safe Harbor contributions.