Developed under the Small Business Job Protection Act of 1996, a safe harbor 401k is a specific type of 401k retirement savings plan built to encourage employee contribution and participation. This act was designed to avoid discrimination between higher-paid and lower-paid employees and came in response to a history of higher-paid employees' receiving higher-percentage contributions.
All Safe Harbor 401k contributions must be fully vested, immediately. The employer must regularly notify employees of their rights associated with this type of 401k. Like other 401k plans, these plans must adhere to strict IRS guidelines in terms of discrimination between employee pay levels. Employees are allowed to contribute a certain portion of their salaries to the plan each time they get their paychecks. To be considered eligible, the employee must be at least 21-years-old and have worked one year and 1,000 hours with the company within that first year from the date of hire. For instance, an employee hired on February 3, 2010, will have until February 3, 2011, to log 1,000 hours with the company. Assuming the employee is 21 or older at the time, contributions to the plan may be made beginning February 4, 2011.
What are the safe harbor 401k contribution limits?
The safe harbor 401k contribution limits are the same as contribution limits on other 401k accounts in a given year. For example, the contribution limits for traditional 401k's and safe harbor 401k's remained $16,500 from 2008 through 2010. The key difference with the safe harbor plan is not its limits but the treatment it applies to highly compensated employees (HCE's), preventing them from receiving more than their fair share of contributions from the employer. Additionally, all contributions are immediately fully vested in the account. Employees are encouraged to participate heavily in contributions, as employer contributions may be limited.