What does a safe harbor have to do with a 401(k)?

In the retirement industry, we throw around several vernaculars that are foreign to the normal American. 401(k) plans were enacted by Congress in the Employee Retirement Income Security Act of 1974 ("ERISA") in response to the mismanagement of pensions. When Studebaker ceased car production, many workers lost their jobs and their retirement at the same time. ERISA provides a roadmap that everyone must follow regarding qualified retirement plans. Safe harbor simply refers to guidelines employers must follow to protect themselves from liability.

A "safe harbor" provision commonly appears when discussing different 401(k) plan design options. Safe harbor plans play a vital role in retirement plan administration by specifying how key elements—such as eligibility requirements, entry dates, employer matching contributions, and vesting schedules—are determined and communicated to employees. These plans are particularly attractive to employers because, by adhering to the specific rules established under safe harbor regulations, a plan will automatically meet three critical annual IRS nondiscrimination tests: the Actual Deferral Percentage (ADP) test, the Actual Contribution Percentage (ACP) test, and the Top-Heavy test. Passing these tests is crucial, as they ensure that benefits provided to highly compensated employees do not unfairly exceed those offered to other workers. Consequently, safe harbor designs simplify compliance for plan sponsors and create a fair and accessible savings environment for every eligible employee.

With a compliant safe harbor plan in place, all employees are afforded the opportunity to contribute the maximum amount allowed by law—regardless of their position or salary. For the 2025 tax year, the IRS has established a maximum employee contribution limit of $23,500 to 401(k) plans. In addition, employees who are age 50 or older can make a "catch-up" contribution, which boosts their annual savings limit by $7,500. Recent changes introduced by the SECURE 2.0 Act further enhance retirement savings for employees in their early sixties: for those ages 60 through 63, the catch-up contribution limit rises to $11,250 in 2025. This evolution in contribution rules provides an important opportunity for individuals nearing retirement age to maximize their long-term savings and better prepare for their financial future. Safe harbor provisions, therefore, offer both regulatory benefits for employers and significant savings advantages for employees.

Below is a chart of common safe harbor plan designs.

Schedule a PEP talk with us if you are interested in starting or improving a retirement plan for your business.