Determining the correct type of 401(k) plan for your small business can be challenging. With so many options and so much to consider, one key decision you may have to make is whether to go with a traditional plan design or a safe harbor plan design. This is a vitally important decision, as your choice can have long-term implications for both your employees and your company.
Effective Date for Safe Harbor Plans in 2025
October 1, 2025, is the deadline to adopt a new Safe Harbor 401(k) plan for the 2025 calendar year. This ensures the plan runs for at least 3 months, which is required for eligibility and salary deferrals.
Key differences between traditional 401(k) plans and safe harbor plans
Although traditional 401(k) plans allow both employees and employers to contribute to employee accounts, the amount that Highly Compensated Employees (HCEs) can contribute may be restricted by maximum income and discrimination testing limits. Traditional plans are required to go through discrimination testing to ensure HCEs are not disproportionately advantaged in the plan. But with a safe harbor plan design, employers can match employee contributions or make non-elective safe harbor contributions without many of the Department of Labor/IRS regulations that come with traditional plans.
And as an employer sponsoring a traditional 401(k) plan, you may be limited in the amount you can personally contribute to your retirement savings. On the other hand, a safe harbor plan allows an employer to make a minimum contribution to employees’ accounts, while giving the owner and other HCEs the ability to maximize their contributions to the plan. This added benefit may be well worth the potential higher cost of a safe harbor plan. For small companies, the popular safe harbor design can be a win-win for both owners and employees.
Benefits of safe harbor retirement plans
A safe harbor plan is an attractive alternative for businesses that want the benefits of a 401(k) plan but do not want to, or are not able to, satisfy the required annual compliance testing.
Safe harbor retirement plans can have several additional advantages for small businesses.
- Allow business owners and other HCEs to contribute the maximum annual deferral amount into their accounts.
- Allow plans to bypass top-heavy rules and discrimination tests for salary deferrals and employer contributions, as long as they meet the safe harbor provisions.
- Limit the effects commonly felt from the IRS's top-heavy and non-discrimination testing.
- Help reduce business taxes and help employees build a larger nest egg, all at the same time.
There are, however, some downsides when considering a safe harbor plan versus a traditional 401(k) plan. Safe harbor plans can be more expensive than traditional plans. If your business has inconsistent revenue streams, it may not be easy to maintain year-round matching or non-elective contributions.
To get the benefits of safe harbor, plans must also meet several criteria to qualify, including required employer contributions, mid-year amendment restrictions, and potential notice requirements. Not sure if safe harbor is right for your company? Click here to schedule a call.
Click here to view our 2025 Safe Harbor Guide