How Does Safe Harbor 401K Help My Business?


When running a business, an important concern to keep in mind is that of retirement planning for both yourself and your employees. When it comes to retirement plans, there are a number of considerations to make. It’s also important to know that the IRS monitors fairness in retirement plans through the use of nondiscrimination tests. If your business fails these tests, you face a tough situation filled with fines, extra paperwork, and potential penalties.

However, there are provisions in place known as Safe Harbor 401ks that can give business owners peace of mind that they will pass these tests and be able to focus all of their energy where it’s needed: on their business.

What Exactly is a Safe Harbor 401k Plan?

Put simply, Safe Harbor 401k plans allow business owners to easily pass the three IRS nondiscrimination tests by agreeing to provide minimum contributions to employees’ plans each year. These tests are in place to ensure fairness in retirement plans. The tests work to verify that higher paid individuals in businesses are not being favored in their retirement plans over lower-earning individuals in the company.

The tests are very time consuming and can be devastating for businesses if they are routinely failed. Therefore, many businesses seek out ways to avoid the tests entirely. A Safe Harbor 401k is one such solution.

Will My Business Benefit from Having a Safe Harbor 401k Plan?

On the surface, a Safe Harbor 401k plan seems like something that every business should have in place. However, not every business would benefit from the plan, and careful considerations need to be made if you are considering implementing the plan.The following two considerations need to be closely examined for your business:

  1. Size of Your Company. Generally, smaller businesses will see the most benefit from a Safe Harbor 401k plan (specifically companies with less than 25 employees).
  2. Past Failure of IRS Nondiscrimination Tests. If your business has failed IRS compliance testing in the past, you may consider instituting a Safe Harbor 401k Plan. The plan does relieve some of the administrative burden, however you should expect to pay more to match your employees’ plans and in cost of the plan in general.

Can I Still Set Up a Safe Harbor 401k for My Business This Year?

If you are considering starting a Safe Harbor 401k, you should move quickly. The process can take some time, and the deadline for starting a Safe Harbor 401K for 2021 is October 1st, 2021.

On the other hand, if you just want to modify your existing plan to include a Safe Harbor provision, you will need to do so by November 30th, 2021.

Final Thoughts

Of the many considerations you need to make as a business owner, retirement planning is one of the most important. If you are considering starting a 401k retirement plan for your business and are unsure of whether you should include a Safe Harbor provision, speaking with a plan provider may help guide you in making the best decision for your business and your employees.

Pax Heber
the authorPax Heber