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 (as amended). That legislation 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.
Typically, you will see "safe harbor" used in reference to the options for plan designs. The plan design includes requirements for eligibility, entry dates, employer matching contributions, vesting, etc. Safe harbor plan designs automatically pass three key annual IRS-mandated nondiscrimination tests and enables all employees to save the maximum amount allowed.
The IRS just announced that individuals can contribute $23,500 to their 401(k) in 2025. Employees aged fifty and older can make an additional catch-up contribution of $7,500. Under a change made in SECURE 2.0, a higher catch-up contribution limit applies for employees aged 60, 61, 62 and 63. For 2025, this higher catch-up contribution limit is $11,250 instead of $7,500.
Below is a chart of common safe harbor plan designs.
|
|
Employer Contribution |
Vesting |
Recipients |
Automatic Enrollment |
|
Qualified Automatic Contribution Arrangement |
3.5% Match |
Up to 2 yrs. |
Savers |
Required |
|
Qualified Automatic Contribution Arrangement Nonelective |
3% |
Up to 2 yrs. |
Eligible employees |
Required |
|
Safe Haror Match |
4% Match |
Immediate |
Savers |
Optional |
|
Safe Harbor Nonelective |
3% |
Immediate |
Eligible employees |
Optional |
|
Enhanced Safe Harbor Match |
4% Match or More |
Immediate |
Savers |
Optional |
|
Enhanced Safe Harbor Nonelective |
3% or more |
Immediate |
Eligible employees |
Optional |
Schedule a PEP talk with us if you are interested in starting or improving a retirement plan for your business.