6 reasons to open a Safe Harbor 401(k) plan

While many businesses and HR teams want to offer a 401(k), the compliance and administration headaches can become blockers to following through.

Luckily, there's a type of 401(k) plan that can help make offering retirement benefits easier.

A Safe Harbor plan is a special kind of 401(k) that can help boost employee participation, reduce administrative work, and automatically satisfy most nondiscrimination testing. These plans require sponsors to offer a contribution, which can encourage participants to save more for retirement. When plan sponsors take this step to encourage more employees to participate, the IRS provides them with a "safe harbor" from certain nondiscrimination testing processes and the costly consequences of failure.¹

If this concept is new to you, you're not alone. Data from a recent survey found that more than half of retirement benefit decision-makers are unaware of or unfamiliar with Safe Harbor 401(k) plans.² And even though about half of the respondents said they knew about Safe Harbor 401(k) plans, only one-third of them could correctly identify the plan design’s marquee benefit — that it is a 401(k) plan that satisfies most nondiscrimination testing.

Below we’ll take a look at just a few of the many ways a Safe Harbor 401(k) can help you, your employees, and your business:

1. With a Safe Harbor plan, all employees can maximize savings

All 401(k) plans must pass nondiscrimination testing to ensure that non-highly compensated employees benefit similarly to owners and executives. Safe Harbor plans automatically pass the Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP), and top-heavy tests, freeing all employees to max out their 401(k) — without employers needing to stress about failing compliance tests.

How do Safe Harbor plans automatically pass these tests? They require a mandatory employer contribution. As long as you make a specified match or non-elective contribution, you usually won't have surprise refunds or additional employer contributions at the end of the year.

2. Plan sponsors can save money on taxes

As a plan sponsor, you can enjoy additional tax savings for making Safe Harbor contributions. Employer contributions may be deductible as a business expense on your federal income tax return and are also free from payroll taxes. In fact, you and your employees may get more value out of these funds than from an outright bonus because of the tax-deferral opportunity a plan offers.³

3. New plan sponsors can receive up to $16,500 in tax credits

If you're starting a new 401(k) plan, you may be eligible to receive up to $16,500 in tax credits over a three-year period. This credit can offset plan administration costs.³

Included in this $16,500 is a small business startup tax credit under the SECURE Act. The Acts allow small businesses — up to 100 employees — to receive an annual tax credit of up to $5,000 depending on how many employees participate in the plan. The credit applies for up to three years and is limited to 100% of eligible plan startup costs for businesses with 50 or fewer employees or 50% for those with 51 to 100 employees. Eligible plan startup costs include plan setup, administration, and employee education expenses.

4. Safe Harbor plans are easy to administer and manage

Safe Harbor plans have a lot of additional requirements and regulations. But with the right provider, they don't have to be any more complicated to administer than a traditional 401(k). At Guideline, we handle most notice requirements, participant disclosures, contributions, and timing requirements. In fact, plan administration on a Guideline Safe Harbor 401(k) takes less than 30 minutes a month for most plan sponsors.²

5. A Safe Harbor 401(k) can help you retain top talent

According to a recent study, 40 percent of employers believe workers leave their role to find a job with better benefits. Over the past few years, employees have increasingly recognized the significance of saving for retirement. To attract and retain top talent, offering a 401(k) – especially one with an employer contribution – can be just as impactful as a competitive salary and healthcare coverage.

All Safe Harbor plans require some sort of company contribution. By offering a company-sponsored 401(k), you are not only providing a generous and popular benefit — you're investing in your employees' retirement and incentivizing them to save for their future. This can help get new talent in the door in an increasingly competitive marketplace and keep them there for years to come.

6. Safe Harbor plans are flexible for businesses of any size

There's a common misconception that Safe Harbor 401(k) plans are best-suited for small businesses. But in reality, with several Safe Harbor match and non-elective formulas to choose from, these plans offer the flexibility to fit in budgets of all shapes and sizes. In fact, the number of businesses with 100+ employees offering a Guideline Safe Harbor 401(k) increased 35% from 2022 to 2023.⁴

Though we've already touched on the other great benefits above, to recap — a Safe Harbor 401(k) is a great solution for any employer looking to: