Finding and retaining top talent is paramount for any business’s success, affecting everything from company culture to your bottom line. A safe harbor 401(k) allows you to provide employees with higher retirement contributions while offering the potential for higher contributions to owners and highly compensated employees. Read on to learn more about the safe harbor 401(k).

What is a Safe Harbor 401(k)?

A safe harbor 401(k) is similar to a traditional 401(k) in that employees make pre-tax deferrals, but unlike a traditional 401(k), employers are required to make contributions to employees’ safe harbor 401(k) plans that are fully vested when made. As long as employers meet the requirements for matching contributions, they can avoid the complex annual non-discriminatory testing that traditional 401(k) plans are subject to.

More About Employer Contributions

The following options are available for employers to meet the matching contribution requirements for a safe harbor 401(k):

• Contribute 3% of every employee’s salary regardless of whether they also contribute
• Provide a 100% match of the first 3% of employees’ contributions and 50% of the next 2% of their contributions
• Provide a match that is at least as generous as the two previous options, but can be up to 6% of the employee’s annual compensation

As long as the minimum contribution is fulfilled, the employer is then permitted to defer the maximum $20,500, or $27,000 for those age 50 or older, into their own 401(k).

Benefits for Employers

Because safe harbor 401(k) plans are excluded from non-discrimination testing, they’re typically one of the easiest plans to oversee and generally create very few administrative and legal issues compared to other plans. Additional benefits include:

• A status of exemption from tests to determine if key employees own more than 60% of the assets in a retirement plan
• No need to create and adhere to a vesting schedule, since all employer contributions are fully vested as they are made
• Providing highly compensated employees with the largest deferrals possible
• Bypassing fees that are included with traditional retirement plans
• The ability to offer a plan with immediate vesting and matching contributions as a tactic to attract potential employees

Small Businesses Might Find a Safe Harbor 401(k) to be More Cost-Effective

A safe harbor 401(k) is easier to administer than a traditional 401(k), and small businesses may find that it’s more cost-effective to make retirement contributions on behalf of employees rather than contend with the more expensive and troublesome non-discrimination testing. Keep in mind, however, that the upfront cash to fund employer contributions will likely be higher overall. If your goal is to meet the maximum retirement contribution for yourself and your best employees, and you are prepared to forgo some plan flexibility, a safe harbor 401(k) is worth looking into.