Owners and highly compensated employees who are eligible participants in a safe harbor 401(k) plan are typically allowed to receive an employer contribution using the same safe harbor formula that is applied to the rank-and-file plan participants. However, some plans that use a cross-tested allocation method may exclude owners and/or highly compensated employees from receiving a safe harbor contribution. The adoption agreement will detail the safe harbor allocation provisions for each plan.
Safe harbor plans may also provide additional benefits to business owners, including the following:
- Safe harbor contributions may satisfy top heavy requirements.
- 3% Safe harbor nonelective contributions may be included in cross-testing.
- Safe harbor plans are deemed to satisfy nondiscrimination testing which allows all participants to maximize contributions, up to the annual IRS limits.
- Offering a safe harbor contribution can help employers attract and retain qualified employees.
- Contributions made to a safe harbor plan typically qualify as a tax deduction for the employer.
Blog authored by Sara Lewis, Retirement Plan Administrator.