Safe Harbor 401(k) Plan Definition

Term Definition
The conditions that allow small businesses a more simplified method of accomplishing non-discrimination requirements when establishing 401(k) plans for employees.

Extended Definition
Safe harbor gives the small business community access to the provisions granted to them through the Small Business Job Protection Act of 1996, so that 401(k) plans are managed in a non-discriminatory way. In this way, small businesses are able to provide retirement benefits to all their employees without the risk of failing and correcting discrimination tests.

401(k) plans must be tested each year to ensure that the plan does not discriminate in favor of highly compensated employees. This means highly compensated employees should not be able to contribute substantially more in tax-deferred money than everyone else. When a test fails, highly compensated employees may be at risk of getting a taxable refund of some of their 401(k) contributions. When you adopt a safe harbor 401(k) plan, your highly compensated employees can contribute the maximum allowed (defined by IRS limits) without the risk of a refund.

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