What is a safe harbor plan?

Whether you’re an employer setting up a workplace sponsored retirement plan for the first time, or you already manage a plan and are thinking about amending it, this article can help you decide whether a safe harbor plan is a good fit for your organization.

A safe harbor employer sponsored retirement plan is a type of 401(k) or 403(b) that meets or exceeds Internal Revenue Service (IRS) specifications aimed to increase compensation equitability among staff within a workplace.

Why might an employer adopt a safe harbor plan instead of a standard 401(k) or 403(b) plan?

If you want to increase your plan’s equitability, you can adopt design features that are similar to or more generous than safe harbor plan requirements. But, by designating your plan a safe harbor plan in the “adoption agreement,” which is the legal plan document, you commit to fulfilling the safe harbor requirements for the plan year. This commitment affords you some benefits:

Automatically pass “nondiscrimination” testing – standard plans must pass annual nondiscrimination and top heavy tests. These tests are a way for the IRS to increase the likelihood that workplace retirement plans meet their original purpose: giving more ordinary workers a chance to save for retirement. The tests gauge whether non “highly compensated” employees at an organization are sufficiently benefiting from the plan, compared to their highly compensated colleagues. A safe harbor plan automatically passes these tests.

• If your organization has highly compensated employees, a standard plan may fail the tests. Failure may come with tax penalties. A safe harbor plan may enable highly compensated staff to maximize their retirement contributions while keeping your plan IRS compliant.
• Some third party plan administrators charge for conducting the tests. And doing them in-house can be a headache. So, a safe harbor plan may save your organization time, money, and effort. Note: If you work with Just Futures to set up a plan, you will not pay an additional testing fee, even if your plan is not a safe harbor plan.
• Compared to some standard plans, safe harbor plans may make you a more desirable employer. Safe harbor plans offer employees more generous benefits than plans that do not meet safe harbor minimum equitability standards. So, safe harbor benefits may attract prospective talent. A safe harbor plan may also increase staff members’ job satisfaction and the likelihood that they keep working with you.

Note: If your company offers a safe harbor plan or a standard plan, you may qualify for tax benefits. As of March 2025, these tax benefits do not extend to nonprofit organizations. But Just Futures has joined advocates to push the IRS to allow nonprofits to be eligible for the same tax advantages.

What are the downsides of a safe harbor plan?

Because safe harbor plans incorporate a matching or guaranteed (“non-elective”) employer contribution, they can be more expensive for an employer, depending on how many staff participate and how much they contribute from their own salary.

What are the kinds of safe harbor plans?

Basic match – if an employee contributes from their salary, then the employer matches 100% of the contribution, up to 3% of the employee’s salary. Then the employer matches 50% on the next 2% of the employee’s salary. With this formula, an employee can receive a matching contribution into their retirement account of up to 4% of their salary. Employer contributions are immediately fully vested.*

Enhanced match - the employer match must be at least as generous as the basic match. Often, employers that choose this safe harbor plan type match 100% of employee contributions on the first 4% of the employee’s salary. Employer contributions are immediately fully vested.*

Guaranteed (“non-elective”) – even when an employee does not contribute to their account from their own salary, the employer contributes the equivalent of at least 3% of the employee’s salary into the employee’s account. Employer contributions are immediately fully vested.*

Qualified Automatic Contribution Arrangement (QACA) – employers automatically enroll their employees to contribute at least 3% of their own salary into their account in year one. The automatic contribution increases in subsequent years to at least 6%, with a 15% maximum. Employers must notify employees of this policy, and employees can opt-out. Further:

If an employee contributes from their own salary, then the employer matches the contribution at 100% of the first 1% of the employee’s salary, plus 50% of the employee’s salary from 1% to 6%. The highest amount the employer would contribute is 3.5% of staff salary, compared to 4% in the above matching options.

OR

The employer contributes the equivalent of 3% of the employee’s salary, even if the employee does not contribute from their own salary.

With a QACA, employer contributions must be fully vested within two years.*

If you like one of the safe harbor plan design types but want the flexibility to change plan details during the plan year, then you can adopt those design features without designating your plan a safe harbor plan. In this case, your plan is a standard plan, and it will not automatically pass nondiscrimination tests.

To increase equitability, Just Futures generally encourages employers to offer guaranteed contributions. Other best practices include: automatic enrollment and escalation, covering fees on employees’ behalf, minimizing thresholds for employees to be eligible to participate in the plan, minimizing the vesting period,* and choosing a plan provider that offers high quality financial education.

I’m an employer. How can I set up a safe harbor plan?

If you have a standard plan that you want to amend to be a safe harbor plan, contact your plan administrator. If you don’t have a plan yet, then check out our article Nine questions to ask a prospective 401(k)/403(b) provider. Or, if you’d like to learn about the advantages Just Futures can offer, contact us.

Because plan setup or amendment can take time, consider initiating the process in late summer or early fall.

Dates to keep in mind:

• For starting a new safe harbor retirement plan, the IRS requires employees to be able to make contributions into safe harbor plans no later than the first pay date on or after October 1. And employers must give employees at least 30 days notice (by September 1).
• For an existing standard plan seeking to become a safe harbor plan, deadlines depend on whether the safe harbor plan will offer matching or guaranteed (“non-elective”) contributions.
  • • For matching contributions, the employer must finalize the plan document amendment by December 31 for the safe harbor plan to take effect the next year. And the employer must notify employees 30 to 90 days before the start of the plan year. 
    • For guaranteed contributions, no employee notification is required. If the guaranteed contribution is less than 4%, then the employer must amend the plan document prior to 30 days before the end of the plan year for which the plan is safe harbor. So, if the safe harbor plan begins on January 1, 2025, then the employer has until December 1, 2025 to amend the document. If the guaranteed contribution is 4% or more, then the employer must amend the plan document before the final day of the plan year after the plan year for which the plan is safe harbor. So, if the safe harbor plan begins on January 1, 2025, then the employer has until December 30, 2026 to amend the document.

Hungry for more knowledge? Read on to learn how to make your organization’s retirement plan more equitable.

~Lisa, Manager of Coalitions and Worker Power

*Any contributions an employee makes are theirs. But depending on the plan’s vesting schedule, the matching contribution may not be theirs unless they meet the requirements. Some vesting schedules require employees to stay at their job for a predetermined amount of time before the employer match is theirs to keep. For example, the employee might be entitled to 100% of an employer match if they've stayed 3 years, but none if they leave before then. Another variation of a vesting schedule is earning 20% of an employer match for every year the employee stays, so they receive 100% of the match once they've stayed for 5 years.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Nothing contained herein is to be considered a solicitation, research material, an investment recommendation or advice of any kind.

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Published March 26, 2025