Safe Harbor Plans for Small Businesses

If you are considering a 401(k) plan for your small business but are concerned about meeting the IRS nondiscrimination rules for employees, you may have another option -- a safe harbor 401(k).

Traditional 401(k) plans are subject to nondiscrimination testing to demonstrate that the plan does not benefit highly paid employees -- such as the owner -- more than lower-paid employees. Safe harbor 401(k) plans, in contrast, allow the plan to forgo this testing by adhering to a number of requirements that do not apply to traditional 401(k) plans.

  • Employer contributions: Unlike a traditional 401(k), employer contributions to a safe harbor 401(k) are mandatory.
  • Vesting: Employer contributions are 100% vested to employees.
  • Notification requirements: Written notice to plan participants of the plan provisions, contribution formula, and other plan information must be provided between 30 and 90 days before the start of each plan year.

Employer Contribution Formulas

Before the beginning of each plan year, the plan sponsor selects one of two safe harbor designs, and notifies employees accordingly.

The first option is for the employer to contribute at least 3% of compensation for every employee -- even those who opt out of employee contributions.

In the second option, the employer matches all or part of employees' contributions in the following manner. For the first 3% of pay that the employee contributes, the employer provides a 100% match. For employee contributions between 3% and 5% of pay, the employer provides a 50% match.

Let's use the following hypothetical example to illustrate how each formula works.Suppose you have three employees -- Kevin, Leslie, and Michael -- each of whom earns $40,000 annually.

  • Kevin contributes 6% of his salary, or $2,400 a year, to the business's safe harbor 401(k).
  • Leslie contributes 4% of her salary, or $1,600 a year, to the business's safe harbor 401(k).
  • Michael chooses not to participate.

Under the first option, the employer opts to contribute 4% of compensation for all employees. Therefore, the employer contribution to each of the three accounts for the year will be $1,600. Note that Michael still receives an employer contribution even though he does not contribute to the plan.

The second option is a bit more complicated.

  • Kevin receives an employer contribution of $1,600, calculated as follows. The first 3% of his contribution is matched dollar for dollar, equaling $1,200. The next 2% of his contribution is matched at 50 cents on the dollar. As the next 2% of his contribution equals $800, Kevin's employer contributes an extra $400. Note that not all of Kevin's contribution is matched as he contributes more than 5% of his salary.
  • Leslie receives an employer contribution of $1,400. As with Kevin, the first 3% of her contributions is fully matched, equaling $1,200. Because she contributes 4%, only the next 1% will receive the partial employer match. The next 1% equals $400, so Leslie's employer adds half that amount, or $200, to the employer contribution.
  • Michael does not receive an employer match as he did not contribute to the plan.

At a Glance

In most other respects, safe harbor 401(k) plans have much in common with traditional 401(k) plans. Both types of plans have the same eligibility requirements, employee contribution limits, and catch-up provisions, and permit loans and distributions. On the administrative side, plan sponsors have the same fiduciary responsibilities (for example, investment diversification and employee communications) and receive similar tax benefits.

The table below compares key features of safe harbor and traditional 401(k) plans.

Traditional 401(k) Plan

Safe Harbor 401(k) Plan

Employer contribution requirement


Flat percentage or matching contributions required

Employer contribution amounts

One or both:
• Percentage of employee's compensation
• A match equal to employee's contribution

One of either:
• Employer profit sharing contribution: Minimum of 3% of employee's compensation
• Employer match: Full match of employee's contribution -- up to 3% of employee's compensation -- plus 50% of employee's contribution between 3% and 5% of employee's compensation

Vesting of employer contributions

Vesting schedule permitted

Fully vested upon distribution

Employee eligibility requirements

Age 21 and 1 year of service (1,000 hours)

Age 21 and 1 year of service (1,000 hours)

Employee contribution amounts

Annual limit for 401(k) plans set by the IRS

Annual limit for 401(k) plans set by the IRS

Administrative filings

Form 5500 and summary annual report

Form 5500 and summary annual report

Nondiscrimination compliance tests


Automatically satisfied

This list is not exhaustive -- there are many other factors that go into deciding between a traditional and safe harbor 401(k), as well as several timing considerations. A Retirement Program Specialist can provide additional information and help you determine how a safe harbor 401(k) might apply to your business.



United States Department of Labor, 401(k) Plans for Small Businesses, IRS Publication 4222, November 2013.

Stuart Robertson, “Annual Deadline for Starting A Safe Harbor 401(k) Plan Fast-Approaching,” Forbes, September 18, 2013.

Withdrawals from retirement plans are subject to ordinary income tax treatment and if taken prior to age 59½ may be subject to an additional 10% federal income tax penalty.

This article has been written by and obtained from an outside source and is provided for general information purposes only. This material does not constitute an offer or solicitation of any kind and is not intended, and should not be relied upon, as investment, tax, legal, or financial advice or services. 

Securities offered through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC. Annuity and insurance products, including those issued by AXA Equitable Life Insurance Company (NY NY), offered through AXA Network, LLC, which conducts business in CA as AXA Network Insurance Agency of California, LLC, in UT as AXA Network Insurance Agency of Utah, LLC and in PR as AXA Network of Puerto Rico, Inc.

The retirement plan would be funded by an annuity contract issued and distributed by AXA Equitable Life Insurance Company (AXA Equitable), New York, NY. Annuities contain certain limitations and restrictions.

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