What is a Safe Harbor 401k

The purpose of a safe harbor 401(k) plan is to ensure that the plan set up by your company is not subject to the IRS non-discriminatory tests.  These tests make sure that the 401(k) plan is not set up to benefit the highest-earning associates of the company but instead favor participation from all levels of the organization.

The Two Categories of Employees

To understand how the IRS measures the equality of contribution to the 401(k) plan we need to understand the difference between a high earning employee versus a non-high earning employee. 

HCE (highly compensated employees) is defined as either owning 5% or more interest in the company or earning hundred and $120,000 or more annually. 

NHCE (non-highly compensated employees) are those who either own less than 5% interest in the company or no interest in the company and/or who earn less than $120,000 annually.

IRS Tests For Equality In 401(k) Contributions

The IRS compare the average contributions made by the HCE against those of the NHCE by subjecting the 401(k) plan to the ADP/ACPtests:

1.    ADP: Actual Deferral Percentage Test 

The Actual Deferral is the number of dollars that an associate of the company has placed in the plan from there income. The percentage is calculated by dividing the total dollars added to the plan in a single year against the total income of the employee in the same year.

2.    ACP: Actual Contribution Percentage Test

The Actual Contribution is the number of dollars the company contributed to the 401(k) plan. The percentage is calculated by dividing the company contribution dollars over the year against the associates’ total income in the same year.

To pass the ADP/ACP tests, the total average percentage contributions by HCE’s must not exceed the total average percentage contributions made by the NHCE’s by the IRS defined range

Safe Harbor 401(k)

By setting up a safe harbor 401(k) plan the company is following specific rules that that will ensure that it will automatically pass the nondiscriminatory tests.

The failure to pass the nondiscriminatory tests by the IRS can lead to the majority of the negative financial consequences falling on the shoulders of the principal interest holders in the company.

One of the consequences affecting both HCE and NHCE employees is that if the 401(k) plan fails the nondiscriminatory test – all contributions in the account are returned to the respective participants. This return counts towards the annual income for the year thereby raising tax liability. 

Requirements of a Safe Harbor 401(k) Plan

The employer must contribute to the plan, and the contribution must be vested immediately

1.    Non-elective contribution – the company contributes at least 3% of employee compensation whether they participate in the 401(k) plan are not.

2.    Basic matching – the company matches 100% on the first 3% of the employee compensation and 50% on employee deferrals between 3 to 5%

There is an enhanced matching option that a company can follow and remain within the guidelines of the IRS tests. You should refer to your 401(k) plan guidelines to understand whether your company is among those who do offer a matching plan that allows for higher contributions than the non-elective or basic matching requirements.

If you are confused and need to see worked out dollar contribution examples – then this article on the website Guideline is helpful.


While it is the company decision to participate in a safe harbor 401(k) plan – the responsibility of understanding the plan still falls on the employees.

By understanding the safe harbor 401(k) plan you will begin to understand the risks your employer is willing to take and how safe your 401(k) plan is in the long run with the current employer.

Tim Schmidt


Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He started this website to share his expertise in using his Self-Directed IRA. Most recently he's been advising individuals to diversify into precious metals ahead of a certain recession. He invested with Goldco.