Tick Tock! Tick Tock! Adopt a Safe Harbor 401(k) Plan by September 30th or Wait Until 2023

401(k) plans are the most popular retirement plan in the U.S. today. They enable employees and business owners to save money toward their retirement on a tax-deferred basis. And since they’re intended to benefit all employees, not just the highly-paid ones, the Internal Revenue Code (Code) requires that most 401(k) plans pas three non-discrimination tests every year:

  • Actual Deferral Percentage (ADP) test
  • Actual Contribution Percentage (ACP) test
  • Top-Heavy test

These tests are time-consuming, expensive, and easy to fail. If a test fails, corrections must be made that add to the time and expense.

Good news!

There is a way that a 401(k) plan can avoid these non-discrimination tests and no longer have to worry about failing them.  It is by adopting a Safe Harbor 401(k) plan.

A Safe Harbor 401(k) plan is exempt from non-discrimination testing under the Code.  As a result, it is a great way for small business owners to adopt a qualified retirement plan without having to worry about passing the IRS non-discrimination tests. Plus, there are other benefits as well.

Here are five reasons why your client should adopt a Safe Harbor 401(k) plan and why you should have a serious discussion with your client today.

5 Reasons to Adopt a Safe Harbor 401(k) Plan Today

Let’s look at each of these:

1. No Testing

By adopting a Safe Harbor 401(k) plan, business owners do not have to worry whether their plan passes the IRS’ non-discrimination tests. This means that the owner’s contribution to the plan is not limited by the contributions of other employees, and the owner can max out their contribution. In order to qualify as a Safe Harbor 401(k) plan, the employer must make a guaranteed contribution to the plan for the benefit of all employees.  There are three ways that an employer can make guaranteed contributions:

    • Basic – 100% match on the first 3% of employee contributions plus 50% on the next 2%
    • Enhanced – 100% match on 4-6% of employee contributions
    • Non-elective – 3% of every employee’s salary, regardless of participation in the plan

2. Tax Credits

Safe Harbor 401(k) plans are eligible for up to $5,000 per year for three years to cover startup costs. That’s up to $15,000 in tax credits over three years. Startup costs include setup, administration, and employee education.

3. Reduced Administration

The administration of a Safe Harbor 401(k) plan is much easier and less time-consuming than a traditional 401(k) plan because an employer does not have to perform annual non-discrimination testing.

4. Higher Employee Savings

Safe Harbor 401(k) plans encourage higher contributions because of the employer match. Employees are likely to increase their deferral to the maximum amount eligible for the employer match.  A Safe Harbor 401(k) plan especially benefits higher-paid and key employees, including the business owner, who can contribute up to the maximum deferral, which is $20,500 in 2022, plus a catch-up contribution of $6,500 for those age 50+, without having to worry whether rank-and-file employees are also participating in the plan.  If the plan has a profit-sharing component, the total contribution to the plan is $61,000 for 2022.

5. Greater Employee Engagement

Safe Harbor 401(k) plans encourage greater employee participation. Often, employees do not participate in traditional 401(k) plans, either because they don’t understand them or they do not want to reduce their take-home pay.  A Safe Harbor 401(k) plan provides an incentive for an employee to participate by offering an employer match if the employee makes a contribution.  This is essentially free money for the employee.

Add these 5 benefits up and what do you get? A Safe Harbor 401(k) plan that is easy to start and a great fit for small businesses.

Talk to your clients today and tell them about the benefits of a Safe Harbor 401(k) plan.  If your clients agree that a Safe Harbor 401(k) plan is a good option for them, call RMC and we will help you walk your clients through the process of adopting the plan.

It used to be that a 401(k) plan had to be adopted by the last day of an employer’s tax year.  However, the SECURE Act, which was passed in 2019, changed the deadline for adopting a 401(k) plan.  Now, an employer can adopt a plan as late as the due date of the employer’s tax return, including extensions. That means that the deadline for this year is either September 15, 2022, or October 15, 2022, depending upon whether your client is a partnership, an s-corporation or a c-corporation.   However, the first year of a Safe Harbor 401(k) plan must be at least three months long.  So, the effective deadline for adopting a Safe Harbor 401(k) plan is September 30, 2022.  That means that you have to work fast!


Does your client have a Safe Harbor 401(k) plan yet? If not and your client filed an extension for its tax return, now’s the time to strike. September 30 will be here before you know it, and if they miss the deadline, your client will have to wait until 2023 to have a Safe Harbor 401(k) plan.

We in the Pension Division at RMC Group specialize in working with advisors who serve the small plan market. We can help you market, set up, and administer your clients’ Safe Harbor 401(k) plan.

Call 239-298-8210 or visit our website at rmcgp.com to discover how we can partner with you to help small business owners successfully set up and administer a Safe Harbor 401(k) plan that will maximize their savings and tax deductions.

Tick-Tock! Tick-Tock!

For a more comprehensive discussion of Safe Harbor 401(k)s, see our previous article here.