6 reasons to open a Safe Harbor 401(k) plan

While many businesses and HR teams want to offer a 401(k) plan, compliance requirements and the possibility of administrative headaches might make it seem not worth it.

Luckily, there's a type of 401(k) plan that can help make offering retirement benefits easier: a Safe Harbor 401(k) plan.

What is a Safe Harbor 401(k) plan?

A Safe Harbor 401(k) plan is a special kind of retirement plan that automatically satisfies most annual nondiscrimination testing, enables all employees to maximize their contributions, and reduces administrative work. This type of plan requires sponsors to make an employer contribution, which can encourage more employees to participate in the plan. When plan sponsors take this step, the IRS provides the plan sponsors with a "safe harbor” from certain nondiscrimination tests — and the consequences of failing those tests.²

If this concept is new to you, you're not alone. Data from a recent survey found that more than half of retirement benefit decision-makers are unaware of, or unfamiliar with, Safe Harbor 401(k) plans.³

Of those who did know what a Safe Harbor 401(k) plan is, only one-third of them could correctly identify the plan design’s marquee benefit — that it's a 401(k) plan design that satisfies most of the annual nondiscrimination tests.³

However, among Guideline’s customers, many employers are taking advantage of the value: over 80% of active plans are Safe Harbor 401(k) plans.⁴ Employers are reaping the benefits of the employer contribution with increased talent retention and plan participation.

"We try to leverage every competitive edge possible in our recruiting and retention efforts. To say we offer a 401(k) program with matching means we can compete with and exceed the benefits offered by our peers."

Carol P., CEO

RedKnot Resource Group
Client of Guideline. Views may not be representative of other clients

What are the benefits of a Safe Harbor 401(k) plan?

Below we’ll take a look at just a few of the many ways a Safe Harbor 401(k) plan can help you, your employees, and your business:

1. Avoid the consequences of failing nondiscrimination testing

Nondiscrimination testing is designed to prevent 401(k) plans from benefiting highly compensated employees (HCEs) at a disproportionately higher rate than non-highly compensated employees (NHCEs). The consequences of failure are either that HCEs receive a partial refund of their contributions or that the employer has to make additional contributions to NHCE employees' accounts — neither of which are ideal outcomes.

The nondiscrimination tests a Safe Harbor 401(k) plan automatically satisfies include:

In exchange for making a mandatory employer contribution, a Safe Harbor 401(k) plan shields you from nondiscrimination testing, the administrative burden of compliance, and the results of failing those tests. Failing nondiscrimination testing can be common for small businesses and can prevent owners and HCEs from maximizing their savings each year. That’s because all employees are benefiting from the plan — not just the ones earning the highest salaries.

2. Help employees maximize contributions with fewer worries

When you offer a Safe Harbor 401(k) plan, employees have an easier path to saving for retirement. They may choose to contribute more knowing they're taking advantage of a great benefit: the employer match. And highly compensated employees will be even more motivated to maximize their 401(k) contributions without the risk of having their contributions refunded due to failing the nondiscrimination tests.

There are a few options for how you can contribute to Safe Harbor 401(k) plans, explained here. As long as you make a specified matching or non-elective contribution, you typically won't have surprise refunds or additional employer contributions at the end of the plan year.

3. Plan sponsors can save money on taxes

As the plan sponsor, you can enjoy additional tax savings for making Safe Harbor contributions. Employer contributions may be deductible as a business expense on your federal income tax return and are also free from payroll taxes.

In fact, you may get more value out of these retirement plan contributions than from an outright bonus because of the variety of tax savings opportunities a Safe Harbor 401(k) plan offers.⁵

4. New plan sponsors can receive more than $16,500 in tax credits

If you're an employer starting a new 401(k) plan, you could see significant tax savings from the SECURE Act. These tax credits can directly lower your costs for setting up and running the plan.⁵

Here’s how the SECURE 1.0 Act (2019) and 2.0 Act (2022) can help new plans:

Small Business Retirement Plan Startup Tax Credit: This credit helps with the costs of setting up, administering, and educating employees about your new plan. Small businesses with up to 50 employees qualify for 100% of this credit. Small businesses with more than 50 but less than100 employees can receive an annual tax credit up to 50% of start-up costs. The credit cannot exceed the greater of; 1) $500, or 2) $250 for each NHCE eligible employee, or, 3) $5,000 for each of the first three years.

Automatic Enrollment Tax Credit: If your plan includes an eligible automatic contribution arrangement (EACA) or a qualified automatic contribution arrangement (QACA) feature, you can claim an additional tax credit of $500 per year for the first three years. If you use Guideline, all our plans have auto-enrollment enabled by default, making it more likely you can claim this credit.

Employer Contribution Tax Credit: You can claim up to $1,000 each year, per employee (for employees earning under $100,000), for up to five years (100% for years 1 and 2, 75% for year 3, 50% for year 4 and 25% for year 5). This additional credit means your total tax savings could be much higher than the combined $16,500 from the other two credits, especially if you contribute to many employees' accounts.

Estimate your 401(k) plan costs with our calculator

5. A Safe Harbor 401(k) plan can help you retain top talent

According to the ​​SHRM Employee Benefits Survey, retirement benefits are the most important benefits to employees after health insurance. Employees are increasingly recognizing the significance of saving for retirement. To attract and retain top talent, offering a 401(k) plan — especially one with an employer contribution — can be just as impactful as a competitive salary and healthcare coverage.

By offering a company-sponsored 401(k) plan, you are not only providing a generous and popular benefit, you're also investing in your employees' retirement and incentivizing them to save for their future. This can help you recruit and keep new talent in an increasingly competitive marketplace.

"As a recruiting and retention tool, it's really nice to say that we have a 401(k) and we offer a match."

Jonna M.

Affogato HR Consulting
Client of Guideline. Views may not be representative of other clients

6. Safe Harbor 401(k) plans are flexible for businesses of any size

There's a common misconception that Safe Harbor 401(k) plans are best-suited for small businesses. But in reality, with several Safe Harbor match and non-elective formulas to choose from, these plans offer the flexibility to fit in budgets of all shapes and sizes. At Guideline, Safe Harbor 401(k) plans make up almost 70% of our plans.⁶

Though we've already touched on the benefits above, a Safe Harbor 401(k) plan can be a great solution for any employer looking to:

Need help setting up a Safe Harbor 401(k) plan? Guideline can help

While Safe Harbor 401(k) plans do have more requirements and regulations than a regular 401(k) plan, with the right provider, they don't have to be more complicated to administer than other retirement savings plans. At Guideline, we make it even easier by handling most participant notice and disclosure requirements, employee and employer contributions, and timing requirements.³

Our all-in-one 401(k) plans come with low monthly fees and no transaction fees. All the key features you need are included at no additional cost.⁷

See how other companies like yours are benefiting from sponsoring a Safe Harbor 401(k) plan and remember: October 1 is the final deadline for starting a new Safe Harbor 401(k) plan for 2025.