What is a safe harbor 401(k)?


Quick Answer

A safe harbor 401(k) allows owners and well-compensated employees to receive maximum deferrals because of the necessary minimum contributions, according to Edward Jones. The plan permits both employer and employee financial contributions.

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Full Answer

What makes a safe harbor 401(k) plan attractive is that it allows an employee to prepare for retirement and employers to attract and keep key employees, notes Edward Jones. Several safe harbor 401(k) plans let the employee set aside either part or all of his salary deferrals as after-tax Roth contributions. Plans may come with requirements, such as the employee being at least 21 and having completed at least 1,000 hours or a full year of service for his company. An employer might be able to alter these requirements.

A safe harbor 401(k) plan can be an attractive option for companies with specific characteristics, says Edward Jones. The company should have no more than 25 employees, want to provide employees with a pre-tax salary deferral plan, have no problem with required employer contributions, and allow valued employees and owners to make top salary deferral contributions.

Depending on the plan, there may need to be an administrator who handles plan maintenance, compliance, filing and record keeping, notes Edward Jones. The administrator might also need to complete required testing.

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