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Home Credit Tips

How to Set Up Safe Harbor 401K for Your Business

by Marco Barrett
May 6, 2025
in Credit Tips
0

401(k) is an employer-sponsored plan to ensure that all their employees have dedicated retirement funds. It allows all employees to select a percentage of a salary automatically taken out of their paycheck and invested in the 401(k) account. There are various 401(k) plans that employers can select from, including Traditional, Safe Harbor, SIMPLE, Solo, and Roth plans. You can find more information about these plans from an experienced provider such as Ubiquity.

Content Summary show
What is Safe Harbor 401(k)?
Safe Harbor 401(k) Plan Rules
Steps to Set Up a Safe Harbor 401(k) Plan
1. Determine if this is the plan for you
2. Develop the Plan
3. Decide how to fund the Plan
4. Administer the Plan

What is Safe Harbor 401(k)?

Today, most small businesses use Safe Harbor 401(k) plans for their employees as an easier and less expensive retirement plan. This plan allows business owners to maximize their contributions to the plan and pass annual ADP/ACP tests. Employers must make contributions on behalf of their participating employees to achieve Safe Harbor status. These plans are subject to vesting requirements and special contributions that need to be fulfilled by the employers.

A few basics of safe harbor 401(k) plans - Mauldin & Jenkins

Safe Harbor 401(k) Plan Rules

As a business owner, you should consider the Safe Harbor plan’s following requirements before setting it up. This will help you bypass the traditional non-discrimination testing, and all your employees can benefit from the plan.

  • As an employer, you are required to make contributions. On behalf of your employees, you are required to make these contributions annually.
  • All Safe Harbor contributions must be vested immediately and are not returned to the employer even after the employee resigns or is terminated.
  • As an employer, you must stay within the acceptable contribution limits. If you have less than 50 employees, the employee deferral limits are $19,500 per year. For 50 or more employees, you need to have $26,000 in catch-up contributions as of 2020.

Steps to Set Up a Safe Harbor 401(k) Plan

Contributions made to Safe Harbor plans are tax-deductible, and they provide a guarantee to the business owner and the employees that they will be able to maximize their contributions. If you are a business owner looking to set up a safe harbor plan, here are the steps you need to follow.

1. Determine if this is the plan for you

There are several 401(k) plans to choose from. Each plan has its own advantages. Hence, you first need to determine if this plan is for your business. Generally, medium-growth businesses and startups use the Safe Harbor plan to begin with. They may move to different benefit plans after they become highly profitable firms.

2. Develop the Plan

Businesses need to decide on important conditions of the plan, draw up a contract, notify their employees about their rights and obligations under the new plan. Employers further need to submit the plan within the appropriate IRS deadlines.

3. Decide how to fund the Plan

As an employer, you need to decide how you will fund the plan. Your options include bank funds, assets, traditional brokerage account. You also need to decide if you are making any Roth or pre-tax contributions or contributions under profit-sharing plans.

4. Administer the Plan

Employers can face severe penalties if they do not administer the plan in compliance with the laws. Plan administration can be complicated, and therefore, you can get your plan provider’s help to assist you with compliance and administration.

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