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
Be a smarter, better informed investor.
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.
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

-
How Prepaid Verizon Phone Service Works and When It's a Smart ChoiceExplore the differences between Verizon Prepaid and Verizon Postpaid plans—costs, perks, flexibility, and when going prepaid makes sense.
-
Try This One-Minute Test to Uncover Hidden Health RisksFinding out this little-known fact about your body could reveal your risk of heart disease and more. It's a simple, free check for healthy aging.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
-
Supermarkets Have Become a Pickpockets' Paradise: How to Avoid Falling VictimSome stores regularly rearrange inventory with the aim of increasing purchases, and they're creating opportunities for thieves to steal from customers.
-
I'm a Wealth Adviser: These Are the Pros and Cons of Alternative Investments in Workplace Retirement AccountsWhile alternatives offer diversification and higher potential returns, including them in your workplace retirement plan would require careful consideration.