So, you’re a small business owner, doing your best to keep the ship afloat. You’ve probably considered the importance of a retirement plan, but when it comes to the details (like which plan is best for your company) you might be feeling a little like a deer caught in headlights. If you’ve been using a Solo 401(k) and now you’re expanding, you’re about to face the ultimate test of your business’s growth: the transition to offering retirement plans to employees.
Don’t panic! This isn’t as intimidating as it sounds, and I’m here to walk you through it. Let’s talk about Safe Harbor 401(k) and why this might just be your next best business move, especially as we roll into 2025.
From Solo 401(k) to Safe Harbor 401(k): Why It’s Time to Evolve
Here’s the deal: the Solo 401(k) is like a comfortable pair of jeans — it fits perfectly when you’re running a one-person show. You can contribute a significant amount of money to your retirement, making it one of the most attractive options for solo entrepreneurs.
But here’s the problem: as soon as you hire employees, the Solo 401(k) can no longer do the heavy lifting. It’s like trying to use a kiddie pool for a family of 10! It simply just won’t cut it. Once you have employees, you have to start thinking about a new plan to accommodate them, and that’s where the Safe Harbor 401(k) comes in.
You see, when you hire employees, your plan has to pass certain nondiscrimination tests. These are there to ensure that your highly compensated employees (HCEs) aren’t getting a disproportionate share of the benefits. If your plan fails these tests, you could be asked to return contributions to the highly compensated individuals. In my expereince, this is a nightmare you don’t want to deal with.
A Safe Harbor 401(k) allows you to bypass these tests by offering mandatory contributions to all employees, not just the big earners. So, you’re giving everyone a fair shot at retirement—and making compliance a lot easier.
The 2025 Rules: What’s Changed and What Stays the Same?
Now that we’ve got you excited about the Safe Harbor 401(k), let’s talk numbers. The good news is that 2025 is shaping up to be a great year for 401(k) contributors. Here’s what you need to know:
- Employee Deferrals: The contribution limit for employee deferrals has increased to $23,500. If you’re 50 or older, you get the catch-up contribution, which brings the total to $31,000. And, if you’re 60-63, you get even more (thanks to some changes in SECURE 2.0), bringing that up to $34,750.
- Employer Contributions: As an employer, you’re required to make a contribution on behalf of your employees, and these contributions are pretty flexible. You can go with a Basic Safe Harbor Match — match 100% of the first 3% of employee contributions, plus 50% of the next 2% of salary. Or, you could go all out with non-elective contributions, where you contribute a flat 3% of each employee’s salary, regardless of whether they contribute themselves.
- Compensation Limits: For 2025, the maximum compensation that can be considered for contributions is set at $350,000.
This means that as your business grows, so does your potential to contribute and deduct more in taxes. Talk about a win-win!
Why Compliance Is Your Best Friend
Compliance might sound like a buzzword that you try to avoid like that lingering smell in the office fridge, but in the case of a Safe Harbor 401(k), it’s your best friend. Without compliance, your plan could lose its qualified status. Even worse, you could face hefty penalties or be required to undo everything you’ve worked for.
Here’s the thing: a Safe Harbor 401(k) is relatively low-maintenance compared to other plans, but it still requires you to:
- Make mandatory contributions to employees’ accounts.
- Ensure employees are properly vested in the contributions you make on their behalf (usually immediately in a Safe Harbor plan).
- Stay within contribution limits to avoid penalties and tax complications.
It’s also important to note that the Safe Harbor 401(k) doesn’t remove all compliance obligations — it just simplifies them. You still have to make sure you’re meeting the IRS requirements. But now you don’t have to worry about those tricky nondiscrimination tests that could leave you sweating bullets every year.
Implementing a Safe Harbor 401(k): Not as Hard as You Think
Let’s face it: setting up a retirement plan sounds like it’s going to be a huge headache. But it’s actually not as hard as you might think. Here’s a quick guide to get you started:
First, you’ll need to choose a plan provider. This is usually a third-party administrator or financial institution that will help you set up and manage the plan. Trust me, it’s worth finding someone who knows their stuff to guide you through the process.
Next, you’ll need to decide on the contribution structure. Will you do a match, or will you contribute non-elective 3% for all employees? This is where you get to flex your business’s muscle and decide what works best for your team. And, maybe more importantly, your bottom line.
Once that’s done, it’s time to tell your employees. Make sure they know how the Safe Harbor plan works, what their contributions will look like, and how they can benefit. The more your team understands, the more they’ll appreciate the plan and stick around for the long haul.
Finally, keep an eye on compliance. While the Safe Harbor 401(k) plan is designed to make your life easier. You still need to monitor contributions and filings to ensure everything is above board.
Why Offering a 401(k) Makes Your Business Stronger
By now, you’re probably wondering, “Why go through all this trouble?” Well, offering a 401(k) to your employees—whether it’s a Safe Harbor 401(k) or another plan — has some seriously sweet benefits:
- Attracting and Retaining Talent: A robust retirement plan is a major perk for employees. It shows you care about their financial future, which can make your business a more attractive place to work.
- Tax Advantages for You: As the business owner, you get to deduct your contributions on your taxes. This reduces your business’s taxable income, which means more money in your pocket.
- Boosting Employee Morale: Offering a 401(k) plan makes your employees feel valued. After all, a 401(k) is not just a retirement plan—it’s a sign that you’re invested in their future.
- Potential for Business Growth: When employees feel secure in their retirement, they’re more likely to be loyal and engaged, leading to a more productive and committed workforce. That means your business can grow with fewer turnover headaches.
Whenever I meet with a client that is looking to go from a “solo-preneur” to hiring their first employees… this is often one of the first compliance items we start looking at. To be honest — so should you.
Welcome to the New Age of Accounting. Let’s begin.
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
