Safe Harbor 401(k)s Can Help Small-Business Owners Keep Happy Employees
Immediate vesting and contributions by the employer regardless of the employee’s participation pump up workers. Employers get lower costs and tax benefits.
A safe harbor 401(k) is a great way for small-business owners to reward employees and keep them happy by making generous retirement contributions on their behalf that are immediately vested. And business owners know that finding and keeping good employees is one of the keys to increasing profits.
Immediate vesting means an employee doesn’t have to wait a few years in order to receive 100% of the employer contributions, so they can leave the company anytime if they want.
It also means that the employer avoids costly plan testing and may allow for much higher contributions for both the owner and highly compensated employees.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Nondiscrimination testing is one of the largest disadvantages for company owners running a traditional 401(k) plan. It makes the plan more expensive to operate and may reduce the allowable contributions that can be made by the owner and highly compensated employees.
This required testing is meant to ensure that all employees, regardless of salary or level of income, are treated equally by the plan.
Under testing rules, if non-highly compensated employees aren’t putting enough into the plan, then the amount owners and higher-paid employees can contribute will be limited.
A safe harbor 401(k) allows employers to avoid the nondiscrimination testing as long as they make a contribution on behalf of their employees.
A Safe Harbor 401(k) Requires Employer Contributions
In order to be considered a safe harbor 401(k), the employer must make at least one of two types of contributions on behalf of employees:
- Contribute 3% of every employee’s salary regardless of whether they also contribute.
- Provide a 100% match of the first 3% of employees’ contributions and 50% of the next 2% of their contributions.
As long as this safe harbor minimum contribution is satisfied, the employer can then defer the maximum $20,500, or $27,000 for those age 50 or older, into their own 401(k).
Newly established safe harbor 401(k)s can also take advantage of a tax credit created by the SECURE Act of 2019 that can be as high as $16,500 for starting a new qualified company plan.
The tax credit is equal to $250 for each non-highly compensated employee who is eligible to participate in the plan with a minimum credit of $500 and a maximum credit of $5,000 for three years.
Also, if a business adds an auto-enrollment feature to its plan, it can claim a tax credit of $500 per year for three years.
Safe Harbor 401(k) Could Be More Cost-Effective for a Small Business
While mandatory contributions to employee 401(k) accounts can be an expensive proposition for a large company, for a small business it may be more cost-effective to make retirement contributions on behalf of employees rather than deal with the more expensive and burdensome nondiscrimination testing.
Remember the most important thing the employer may get out of making these employee contributions is keeping good employees happy.
And happy employees tend to stay.
-
Small Caps Can Only Lead Stocks So High: Stock Market TodayThe main U.S. equity indexes were down for the week, but small-cap stocks look as healthy as they ever have.
-
Ask the Editor: Tips for Filing Your 1040Ask the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on preparing and filing your 2025 Form 1040.
-
Is Direct Primary Care Right for Your Health Needs?With the direct primary care model, you pay a membership fee for more personalized medical services.
-
If You're in the 2% Club and Have a Pension, the 60/40 Portfolio Could Hold You BackIncome from your pension, savings and Social Security could provide the protection bonds usually offer, freeing you up for a more growth-oriented allocation.
-
Bye-Bye, Snowbirds: Wealthy Americans Are Relocating Permanently for Retirement — and This Financial Adviser Can't Fault Their LogicWhy head south for the winter and pay for two properties when you can have a better lifestyle year-round in a less expensive state?
-
Consider These 4 Tweaks to Your 2026 Financial Plan, Courtesy of a Financial PlannerThere's never a bad time to make or review a financial plan. But recent changes to the financial landscape might make it especially important to do so now.
-
We Know You Hate Your Insurance, But Here's Why You Should Show It Some LoveSure, it's pricey, the policies are confusing, and the claims process is slow, but insurance is essentially the friend who shows up during life's worst moments.
-
Is a Caregiving Strategy — for Yourself and Others — Missing From Your Retirement Plan?Millions of people over 65 care for grandkids, adult kids or aging parents and will also need care themselves. Building a caregiving strategy is crucial.
-
6 Financially Savvy Power Moves for Women in 2026 (Prepare to Be in Charge!)Don't let the day-to-day get in the way of long-term financial planning. Here's how to get organized — including a reminder to dream big about your future.
-
Private Equity Is Fundamentally Changing: What Now for Investors and Business Owners?For 40 years, private equity enjoyed extraordinary returns thanks to falling rates and abundant credit. That's changed. What should PE firms and clients do now?
-
I'm a Real Estate Expert: 2026 Marks a Seismic Shift in Tax Rules, and Investors Could Reap Millions in RewardsThree major tax strategies will align in 2026, creating unique opportunities for real estate investors to significantly grow their wealth. Here's how it works.
