Safe Harbor 401(k)s are designed to allow owners and highly compensated employees (generally owners and those making over $130,000 in 2021) to contribute up to the maximum dollar limit as their 401(k) elective deferral without regard to what other employees contribute. The maximum deferral for 2022 is $27,000 if a participant is age 50 or over.
Safe Harbor 401(k) Solution vs Traditional 401(k)
Allows the owner and other highly paid employees to contribute the maximum deferral allowed by law no matter how much (or how little) the other employees contribute.
Traditional 401(k) plans are required to ensure that all employees are treated equally under the plan, regardless of the pay level.
Highly compensated employees’ contributions may be limited dependent upon what all other employees contribute as elective deferrals to the plan under the annual ADP/ACP test.
A Safe Harbor 401(k) will be deemed to have automatically met the top heavy requirements regardless of the percentage of the plan assets in the key employees’ accounts.
When the balances of the key employees of the company are at least 60% of the total plan assets, the plan is considered top heavy.
If key employees continue to contribute salary deferrals to the plan, the company is required by law to make a contribution of at least 3% of pay to all other employees in the plan. This is very likely to occur in a small company’s 401(k) plan since key employees are likely to make the largest contribution to the plan.
A safe harbor plan solves these 401(k) plan problems often encountered by a small employer making it a very attractive plan for the small business owner.