Why Some Business Owners Choose a Safe Harbor 401(K) over a traditional 401(k)

A Safe-Harbor 401(k) plan provides a minimum level of contributions to all employees, freeing owners and highly compensated employees to receive larger profit-sharing payments.

A successful business owner knows that finding and retaining top talent is one of the keys to building team unity and increasing profits. Providing valuable employees with generous benefits is one of the best ways to keep them happy.

A safe harbor 401(k) is a great way to reward your employees with higher retirement contributions. It also allows you to legally bypass costly plan testing and opens the doors for much higher contributions to owners and highly compensated employees.   Want to see how a safe harbor 401(k) could transform your business? Read below.

A 3% Contribution to All Staff Gets You Freedom to Maximize Payments for Yourself and Key Employees

A Safe Harbor 401(k) is simply a traditional 401(k) plan with a mandatory employer contribution. Why handcuff yourself with a plan that mandates a required contribution? In return for your generosity, the plan is not subject to annual testing – easing the administrative burden (and associated costs) and freeing owners to make larger contributions to themselves and/or their best employees.

Nondiscrimination testing is one of the largest struggles for company owners running a traditional 401(k) plan. This required testing is meant to ensure that all employees, regardless of salary or stature within the company, are treated equally by the plan. Under testing rules, if “rank and file” employees aren’t putting enough into the plan, the amount owners can contribute for themselves, and highly compensated individuals will be limited.

A Safe Harbor 401(k) allows employers to disregard the nondiscrimination check as long as they make a guaranteed contribution to all their employees. To qualify as a Safe Harbor 401(k), you have two options: either contribute 3% of every employee’s salary (regardless of participation in the plan) or provide a 100% match of the first 3% of employee contributions and 50% of the next 2%. Your strategy and projected cash flow requirements will depend on an estimation of your employees’ behavior and participation in the plan. Once the Safe Harbor minimum contribution is satisfied, you can then defer the maximum $23,000 for yourself and more easily reward your most valuable staffers (and yourself) with profit-sharing plan contributions up to the individual maximum of $69,000.

Like a traditional 401(k) plan, a safe harbor 401(k) still allows you and your employees to make contributions from salary to save for retirement with pre-tax income. Employees can contribute up to $23,000 a year (or $30,500 if they are 50 or older) from their salary. Those who contribute to a Safe Harbor 401(k) benefit from a lower tax bill and potentially far greater savings growth into the future.

A Safe Harbor 401(k) can fit your needs if you want to incentivize highly compensated employees with larger profit-sharing contributions and/or maximize personal retirement savings. You should be willing to sacrifice plan flexibility and be able to fund a 3% employee contribution or 4% match.


A Safe Harbor 401(k) is easier and less expensive to administer than a traditional 401(k), but the cash needed to fund employer contributions will likely be higher overall. Safe Harbor employer contributions are also immediately vested, making it easier for some employees to leave a company sooner than if they had to wait a few years to become 100% vested in a traditional 401(k).

If you are looking to meet the maximum retirement contribution of $69,000 for yourself or your best employees and you are willing to sacrifice some plan flexibility, the Safe Harbor 401(k) is worth exploring. If you would like insight and assistance navigating your retirement plan options, give us a call at 844-377-4963 or use the “Let’s Talk” tool in the right sidebar.

Quick Facts – Safe Harbor 401(k)

  • Employees can contribute up to $23,000 of their salary, tax deferred
  • Employers are required to make a minimum contribution of 3% to all employees or provide a 100% match up to 4% of employee contributions
  • Permits high level of profit-sharing contributions for owners and highly compensated employees
  • Easier to administer than a regular 401(k) – less annual testing required
  • Required employer contribution immediately 100% vested
  • Employer may claim $500 tax credit for plan start-up costs in first three years


Windgate does not provide tax advice. Consult your professional tax advisor for questions concerning your personal tax or financial situation.

Data here is obtained from what are considered reliable sources. We consider the data used to be relevant and reliable.

First published January 28, 2021.  Updated May 2024.

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