There are two ways for a 401(k) Plan to achieve Safe Harbor status.
- Employers make a 3% nonelective contribution for all eligible participants. Employees do not have to defer anything in the plan in order to receive the employer contribution.
- Employers match 100% of the first 3% plus 50% of the next 2% of elective deferrals. Employees have to defer at least 5% of their pay in order to receive the full 4% in matching contributions.
Why go Safe Harbor?
It allows business owners and Highly Compensated Employees (HCEs) to max out their elective deferrals ($18,000 / $24,000) and to receive the Safe Harbor employer contributions. This is because Safe Harbor 401(k) Plans avoid issues that can come up with passing the Average Deferral Percentage (ADP) test and the Average Contribution Percentage (ACP) test.