Why now is the time to talk about Safe Harbor 401(k) benefits with clients

Why should you discuss 401(k)s with your clients?

Discussing retirement savings with clients has benefits for both your business and theirs.

Expand the services you offer

70% of accounting firms surveyed by OnPay last year said expanding client services is their top 2024 priority. But what can you offer that doesn’t require a significant investment and is likely to be on the minds of your clients? Consulting on employee benefits. Over a third of small businesses want to offer their employees access to retirement savings. But with so many providers and plans, it takes a lot of time to understand how each one works and what the costs are. Let your clients know that you can help them make sense of it all — and for a fee that everyone can agree on.

Help your clients keep top performers

It’s likely that retirement benefits are high on the wish lists of the employees who work for your clients. And if you have any clients that are looking to attract top talent or keep their long-standing employees from seeking work elsewhere, helping them provide staffers access to retirement savings can be a difference-maker. Administering a Safe Harbor 401(k) takes much of the guesswork out of offering retirement savings. For clients who are looking for ways to build their company culture, putting a 401(k) plan in motion can help them stand out from the competition.

Retirement savings may be required where they do business 

There’s growing concern about a coming retirement crunch in the US, with over half of Americans feeling financially unprepared as they reach retirement age. In response to this issue, over a dozen states, including California and Illinois, have rules that require employers to offer their employees access to a retirement savings plan (whether private or state-sponsored). Other states, such as New Mexico, have plans in the works. By broaching this topic, you’ll likely help your clients stay ahead of legislative trends. Stay compliant and avoid penalties (fees for ignoring state retirement mandates can vary from $250 to $750 per employee, depending on the place of business).

That said, let’s move on to see why discussing a Safe Harbor 401(k) can be a win-win plan for you and the clients you work with.

What is a Safe Harbor 401(k) plan?

In simple terms, a safe harbor plan is a type of 401(k) that automatically satisfies most nondiscrimination testing (more on that below). It includes certain built-in elements that help employees save for retirement by requiring companies to contribute to their employees’ 401(k) accounts. By taking steps to encourage more employees to participate, the IRS offers employers “safe harbor” from certain nondiscrimination testing processes and the consequences of failing these tests.

Safe harbor plans come with specific requirements and advantages. To make it easier to see how the pieces fit together, here’s a simplified overview:

What are nondiscrimination tests, and how do they affect a 401(k) plan?

In a nutshell, the IRS has set up a series of what it calls nondiscrimination tests designed to measure whether a 401(k) plan unduly favors highly compensated employees. The takeaway? Their purpose is to make sure that all employees benefit from the plan their employer offers.

What do the tests look for?

The IRS requires three main types of nondiscrimination tests to ensure that 401(k) plans benefit both owners and employees.

• Two of these tests compare how highly compensated employees (HCEs) and all other employees use the company’s 401(k)
• The third looks at how much of all plan assets are owned by key company employees

Here’s a brief overview of each.

Actual deferral percentage

The actual deferral percentage (ADP) test measures what percentage of income your HCEs contribute to their 401(k), compared to rank-and-file employees.

Actual contribution percentage

The Actual Contribution Percentage (ACP) test is similar, but it compares employer matching contributions for HCEs with those for everyone else.

Top-heavy test

A third test, the top-heavy test, looks at individuals the IRS defines as “key employees” and measures the value of the assets in their 401(k) accounts, compared to all assets held in the 401(k) plan.

If the plan an employer sets up fails any of these tests, it means dealing with some administrative hassle, potentially expensive corrections, and the possibility of clients having to refund 401(k) contributions.

One of the reasons that safe harbor 401(k)s are growing in popularity because they can generally help companies avoid the uncertainty surrounding annual nondiscrimination testing.¹

Related reading: To get a detailed look at all of these definitions, how the tests are applied, and see examples, check out Guideline’s overview of the three 401(k) nondiscrimination tests.

Setting up a Safe Harbor 401(k) plan

If you read about each test above and thought there were likely too many hoops for clients to jump through, a safe harbor 401(k) might be a better way to start conversations with your clients.

There are two types of Safe Harbor 401(k) plans, each with different requirements. Both lead to the same results regarding annual testing.

• A traditional Safe Harbor 401(k) plan has requirements related to contributions, distributions, vesting, and participant notifications
• A qualified automatic contribution arrangement (QACA) combines the safe harbor provisions with automatic enrollment, and allows for a lower match and the ability to apply a vesting schedule. You can find more information about the automatic enrollment and automatic escalation portion of the QACA here

Safe Harbor plans require that employers contribute to an employee’s retirement 401(k) account in one of two forms: a match or nonelective contribution. This requirement is important because it can help increase savings. According to a recent survey from the US House Committee on Ways & Means, more than half of Americans feel that they haven’t saved enough for retirement.

In exchange for plans to automatically satisfy most nondiscrimination testing, there are some rules companies need to follow. To assist you with getting conversations started with your clients, our 401(k) partner, Guideline, has helped us organize what’s required so you can help business owners get the ball rolling.

Contribution requirements for a Safe Harbor 401(k)

So, what information should your clients become familiar with? The main requirement for a Safe Harbor 401(k) is that the employer must make contributions to it. In a traditional safe harbor 401(k) plan, those contributions must vest immediately. In a QACA plan, contributions can be subject to a maximum of a 2-year vesting schedule. Contributions can take three different forms, the first two of which are matching, which means that employees must defer funds to their accounts in order to receive contributions. The third option requires the employer to make a contribution, even if employees don’t defer any of their income into their plan.

Here are examples of the different contribution formulas:

Basic matching

• Traditional: The company matches 100% of all employee 401(k) contributions, up to 3% of their compensation, plus a 50% match of the next 2% of their compensation
• QACA: The company matches 100% of all employee 401(k) contributions, up to 1% of their compensation, plus a 50% match of the next 5% of their compensation

Enhanced matching

The company matches at a level that is at least as good as the basic matching formula (maximum limits may apply depending on ACP safe harbor status)

• Traditional example: 100% of all employee 401(k) contributions, up to 4% of their compensation
• QACA example: 200% of all employee 401(k) contributions, up to 2% of their compensation
• Nonelective contribution: The company contributes at least 3% of each employee’s compensation, regardless of whether employees make contributions

Contribution limits your clients should know

For 2026, the basic employee deferral limits for a Safe Harbor plan are the same as any employer-sponsored 401(k):

• $24,500 per year for participants under age 50
• $32,500 when you include catch-up contributions for employees over age 50 or older.

There’s another perk: With safe harbor provisions in place — and less to worry about when it comes to nondiscrimination testing — owners and highly compensated employees can truly max out their deferrals. The takeaway? It means that your clients and their employees will be able to take full advantage of their contribution limits.

Now that we know more about how much individuals can contribute, let’s find out some important set-up dates to keep in mind.

Deadlines for Safe Harbor plans

Safe Harbor plans have important timing requirements. Here’s a quick overview of how adoption timing affects contributions and notice obligations.

Plan amendments typically take effect at the beginning of a future plan year. Because amendments and required employee notices must be completed in advance, it’s important to coordinate with your plan administrator well before the new plan year begins.

If clients want to add a Safe Harbor nonelective provision to an existing 401(k) to take advantage of Safe Harbor status for the current plan year, you may generally do so before the 30th day before the close of that plan year, provided you contribute at least 3% of eligible compensation for the entire year.

After that point, a Safe Harbor nonelective contribution may still be adopted through the end of the following plan year, but the required contribution increases to at least 4%.

After that point, a Safe Harbor nonelective contribution may still be adopted through the end of the following plan year, but the required contribution increases to at least 4%.

Employee notice requirements

Annually, each eligible employee must be notified in writing about their rights and obligations under the plan if the plan includes matching or automatic enrollment features. Notice must be given within a reasonable amount of time — at least 30, but not more than 90 days — before the beginning of the plan year.

Making mid-year changes to a safe harbor plan

If you have clients that already offer a Safe Harbor 401(k) plan and they’d like to make changes, there are special rules to follow. All the details for mid-year changes are included in IRS Notice 2016-16, but these are the basic things the IRS requires:

• Give employees an updated safe harbor notice that describes any changes. Notice should be given 30 to 90 days before the changes go into effect
• Give each notified employee at least 30 days to change their cash or deferral election
• A combined notice may be provided

Once you have satisfied the notice rules above, you may be able to make changes to certain aspects of the plan. For example, increasing future safe harbor nonelective contributions from 3% to 4%, or changing the plan entry date for eligible employees from quarterly to monthly.

However, several types of changes are not permissible during the year. Review the rules carefully with clients if any wish to amend their plans.