Safe Harbor 401(k) Plan Definition
A safe harbor 401(k) is a type of retirement plan where employers must make contributions to employee plans in exchange for automatically passing required tests.
Safe Harbor 401(k) Plan Extended Definition
Safe harbor plans give small businesses a simplified retirement plan option in terms of administrative responsibilities. The conditions allow small businesses a more simplified method of accomplishing nondiscrimination requirements when establishing 401(k) plans for employees. In this way, small businesses are able to provide retirement benefits to all their employees without the risk of failing and correcting discrimination tests.
Traditional 401(k) plans must be tested each year to ensure that the plan does not discriminate in favor of highly compensated employees. This means highly compensated employees should not be able to contribute substantially more in tax-deferred money than everyone else. Safe harbor plans automatically pass testing.
Keep in mind that employers must make contributions, and contributions become fully vested when made.
Last Updated By
Rachel Blakely-Gray | Apr 28, 2023