What Are Design-Based Safe Harbors?

Not To Be Confused With "Safe Harbor 401(k) Plans" There Are Other Safe Harbors Used In Retirement Plans

What Is This "Safe Harbor" Term Anyway?

As if it weren't confusing enough, the term “safe harbor” is used throughout the IRC (Internal Revenue Code) to describe conditions that eliminate or reduce a taxpayer’s liability under the law. With regard to retirement plans, meeting “safe harbor” requirements frequently grants nondiscriminatory status to a particular plan provision, thus eliminating the need for additional testing. 

Here we are going to explain what "Safe Harbor" means under Section 401(a)(4), which has everything to do with the employer allocation. See our primer article How to Select the Right Safe Harbor and our focus article on Safe Harbor 401(k) Plan Designs for the top 3 Safe Harbor's used in retirement planning. 

"IRC §401(a)(4) Safe Harbor" Is Not The Same As "Safe Harbor 401(k) Plans" under IRC §401(k)(12) and IRC §401(k)(13)

IRC §401(a)(4): All About The Allocation

From a plan administration standpoint, the least burdensome way to satisfy IRC §401(a)(4) is to use a safe harbor approach. A safe harbor plan can be design-based or nondesign-based.

Design-Based Safe Harbor

A design-based safe harbor plan is one that is designed specifically to satisfy IRC §401(a)(4) because of the method used to allocate employer contributions.

NonDesign-Based Safe Harbor

A nondesign-based safe harbor plan is one that is eligible for a shortcut testing method. This is due to the fact that the plan is designed in such a way that it is less likely to be discriminatory than other more flexible or aggressive plan designs.

It is important to note that while using a safe harbor plan design to satisfy IRC §401(a)(4) (to ensure the employer allocation is not discriminatory) will be less costly to administer it may be more costly to the employer in terms of the amount of contributions provided to its eligible participants.

Design-Based Safe Harbor Allocation Examples

Uniform Allocation Requirements

In order to satisfy the nondiscrimination testing, the allocation formula of design-based safe harbor plans is required to be uniform. This can be either a uniform percentage of Plan Compensation (Pro Rata) or a uniform dollar amount (Per Capita). We'll get into Plan Compensation below for you.

Another type of plan design that is a design-based safe harbor is the Integrated Plan. This plan uses an employer allocation formula where the integration level is the taxable wage base (TWB because #UniglobalLovesAcronyms). In a nutshell, this design fixes the employer allocation amount (a percentage of 414(s) compensation) that each eligible participant will receive for that plan year.

There are at most 2 components in an integrated formula that govern the employer non-elective (profit sharing) allocation:

  1. The first component of the Integrated Formula is called the Base Contribution Percentage.
  2. The formula may also include an Excess Contribution Percentage. The excess contribution percentage is the portion of the contribution (expressed as a percentage) that is allocated on the compensation in excess of the integration level.

An example of Integration at work: A plan may used the Integrated formula (a fixed formula) that will provide for an employer allocation of 5.7% of base compensation PLUS 4% of compensation in excess of the TWB. Perfectly acceptable, but limited (and a bit boring).

As you might have guessed, from the employer's perspective, design-based safe harbor plans with respect to the employer (profit sharing) allocation formula are limited. The uniform requirement limits every participant to the same amount or percentage of compensation. Not ideal if you want to benefit based on job seniority or performance. In which case, we would recommend you take a look at our article on New Comparability and why we love it. 

NonDesign-Based Safe Harbor Allocation Examples

Uniform Points 

There is only one type of nondesign-based defined contribution plan, a relic if you ask us - the Uniform Points Plan. Hardly ever used today, this plan design requires annual testing of the contributions to show that IRC §401(a)(4) is satisfied.

The allocation method under a uniform points plan does not satisfy the design-based safe harbor, because the allocation is determined with reference to factors other than compensation. Therefore, by design, the allocations cannot satisfy the uniform allocation requirement for design-based safe harbor plans.

Plan Compensation

Plan Compensation must satisfy IRC §414(s) for this to work. Section 414(s) discusses what is considered "safe harbor" compensation for plan purposes. IRC §414(s) compensation can be defined under a safe harbor definition or a modified definition.

If a safe harbor definition is used (IRC §415 compensation, for example), then the allocation will always be a uniform percentage of IRC §414(s) compensation, and the plan can rely on the design-based safe harbor without having to test its definition of compensation.

Generally speaking, if the plan's definition of compensation is not inclusive of all taxable income (ex: plan compensation excludes bonuses, overtime, and/or commissions) this is a modified definition. Under this definition, you may be required to prove that the definition is nondiscriminatory and that it satisfies the compensation ratio test as outlined in Treas. Reg. §1.414(s)-1(d). Don't worry though, Uniglobal provides this advanced testing for your plan if needed. 


"Safe Harbor": A term used throughout the IRC to describe conditions that eliminate or reduce a taxpayer’s liability under the law. With regard to retirement plans, meeting “safe harbor” requirements frequently grant nondiscriminatory status to a particular plan provision, thus eliminating the need for additional testing.

Design-Based Safe Harbor: Uniform Allocation based on Plan Compensation that satisfies IRC §414(s). Think "same percentage" or "same dollar amount" for everyone: Common Terms used are Pro Rata, Per Capita, Fixed, and Integrated. 

NonDesign-Based Safe Harbor: Uniform Points Plan (the obscure relic hardly, if ever, used today).