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Benefits Administration

Safe Harbor (401)k: The Employer’s Guide

One Minute Takeaway

  • Some 401(k) plan types may have better benefits for your workforce.
  • Safe harbor 401(k)s require employer contributions to be immediately vested.
  • Safe harbor 401(k) plans are exempt from nondiscrimination testing.

Employees want their companies to help them plan for the future. In a Forbes Advisor survey on the most desired benefits, employees ranked pension and retirement plans in the top three. But employers have several options when it comes to retirement plans to provide, and each comes with its own compliance and tax implications.

Some employers, especially small to medium businesses, prefer a safe harbor 401(k) plan, as it is exempt from some of the most complex tax and compliance requirements. Learn more about the benefits and requirements of a safe harbor 401(k) in the following guide.

What is a Safe Harbor 401(k) Plan?

A safe harbor 401(k) is similar to a traditional 401(k) in that pre-tax deferrals are made by employees. The difference is employers are required to make contributions to employees’ 401(k) plans, and those contributions are fully vested when made. This allows employers to bypass annual IRS nondiscrimination testing.

Employers of any size can use safe harbor 401(k) plans, and they can also be combined with other retirement plans. These plans are especially popular with small businesses looking to avoid complex compliance testing while still offering a strong retirement benefit.

Benefits of Safe Harbor 401(k) Plans

Using a safe harbor 401(k) plan offers benefits to the employer and employee.

For Employers

Employer benefits include:

  • Testing exemption: As long as they meet the requirements for matching contributions, employers are not subject to the complex annual non-discriminatory testing that applies to traditional 401(k) plans.
  • Predictability: The required contribution structure makes budgeting for retirement benefits more straightforward and predictable.
  • Recruitment and retention: Offering immediately vested retirement benefits can help attract and retain top talent.

For Employees

Employee benefits include:

  • Immediate ownership: Employer contributions are vested immediately.
  • No participation required: In non-elective safe harbor plans, employees don’t have to participate in the plan to receive employer contributions.
  • Clarity: Simplified plan rules can make it easier for employees to understand their benefits.

Safe Harbor 401(k) Match Types

Employers must use one of three contribution types to meet the requirement for a safe harbor 401(k). These include:

Basic Match

A basic match means the employer will fully match employee contributions up to 3%. Then, employers offer a 50% match on deferrals between 3% to 5% of an employee’s salary. This contribution type is also called an elective safe harbor 401(k).

Enhanced Match

An enhanced match is one that exceeds, or is more generous than, the basic match. A common formula is a 100% match on the first 4% of deferred compensation.

Nonelective Contribution

Often confused as a match type, a safe harbor nonelective contribution means the employer contributes 3% of more an employee’s salary, regardless of the employee’s deferrals. The employee doesn’t have to participate in the plan at all to receive this match.

Safe Harbor TypeHow it WorksEmployee Contribution required for Full Match
Basic Match100% match on the first 3% deferred; 50% match on the next 2% deferred.Yes (up to 5% of salary)
Enhanced MatchMore generous than the basic match (e.g., 100% on the first 4% deferred).Yes (up to the specified percentage)
Nonelective ContributionEmployer contributes 3% (or more) of salary, regardless of employee deferrals.No

What is a QACA Safe Harbor Plan Option?

A qualified automatic enrollment arrangement (QACA) makes administration easier by automatically enrolling eligible employees into the plan at a predetermined rate. Participants can choose to opt out of the plan or adjust their contribution percentage. In this plan, the employer must at a minimum:

  • Match an employee’s contribution up to 1% of compensation and offer a 50% matching contribution for the employee’s contributions between 1% and 6% of compensation, or
  • Make a nonelective contribution of 3% of compensation to all participants, whether they opt into the plan or not.

Safe Harbor 401(k) Match Limits

In 2025, employees can contribute up to $23,500 into their 401(k) plans. And an employee 50 years of age or older can make an additional catch-up contribution of $7,500. Employees between the ages of 60 to 63 who participate in these plans have an even higher catch-up contribution limit at $11,250.

The employer match is limited to 100% of up to 3% of compensation and 50% of the next 2%, or a non-elective contribution of 3% of compensation.

There is a total annual addition limit that applies to the sum of all contributions to a 401(k) account, including employee contributions, employer matches, and any other employer contributions (like profit sharing).

For 2025, the total safe harbor 401(k) limit is $70,000 ($77,500 if age 50 or older; $81,250 if age 60-63).

CategoryItemLimitIncludes:
Employee Contribution Limit$23,500Employee’s own contributions
Employee ContributionsEmployee Catch-Up (Age 50+)Additional $7,500Employee’s additional contributions
Employee Catch-Up (Ages 60-63)Additional $11,250Employee’s additional contributions
Employer ContributionsEmployer Match (Basic)100% up to 3% of compensation + 50% of next 2%Employer matching contributions
Employer Nonelective Contribution3% of compensation (or more)Employer contributions (regardless of deferral)
Total Annual Addition Limit$70,000Sum of Employee & Employer Contributions
Total Limit (Combined)Total Annual Addition Limit (Age 50+)$77,500Sum of Employee & Employer Contributions
Total Annual Addition Limit (Ages 60-63)$77,500Sum of Employee & Employer Contributions

How Does a Safe Harbor Compare with a Traditional 401K Plan?

A safe harbor 401(k) and a traditional 401(k) serve the same primary purpose — helping employees save for retirement with tax advantages — but they differ in several important ways.

The main difference is that safe harbor plans require employers to make mandatory contributions that vest immediately, while traditional 401(k)s give employers more flexibility with contributions. In exchange, safe harbor plans automatically pass certain non-discrimination tests that traditional plans must undergo annually.

Here’s a detailed comparison between these two types of retirement plans

FeatureTradditional 401(k)Safe Harbor 401(k)
Employer ContributionsOptional; can vary or be zeroMandatory; must follow specific formulas
Vesting ScheduleCan have gradual vesting schedules up to 6 yearsImmediate 100% vesting on safe harbor contributions
Non-discrimination TestingSubject to annual actual deferral percentage (ADP)/actual contribution percentage (ACP) testingAutomatically passes ADP/ACP testing
Administrative RequirementsAnnual compliance testing requiredAnnual notice to employees required
Employee EducationOptionalRequired annual notices

Safe Harbor 401(k) Requirements

Safe harbor 401(k) plans must meet specific requirements to satisfy IRS rules and avoid annual nondiscrimination testing. To qualify, employers must provide mandatory contributions to employees’ retirement accounts. These contributions must be 100% vested immediately.

In addition, employers must provide written notice to all eligible employees one to three months before the start of each plan year. The notice should describe the safe harbor contribution formula and any withdrawal provisions.

Safe harbor 401(k) plans are best used when business owners or highly compensated employees want to contribute the maximum allowable amount to their retirement accounts without being limited by nondiscrimination testing. They’re especially beneficial for SMBs with low employee participation rates, as they eliminate the risk of failed testing and corrective actions.

These plans are also ideal for employers looking to offer a competitive retirement benefit that’s simple to administer and encourages employee savings through guaranteed, vested contributions.

401(k) Nondiscrimination Testing and Safe Harbor 401(k) Plans

One of the key regulations for traditional 401(k) plans is annual, government-mandated nondiscriminatory testing. Known as the ADP and ACP, these tests are designed to prove a plan doesn’t unfairly favor certain employees.

Testing analyzes the savings rates of highly compensated employees compared to non-highly compensated employees. (A highly compensated employee is someone who earns more than $160,000 annually). Traditional 401(k) funds are also reviewed to assess if a company’s fund is top heavy or, in other words, if most of the account contributions are coming from key employees or highly compensated employees. In this case, a key employee is an owner or officer of a business.

Under nondiscriminatory testing, average contributions made by HCEs can’t be more than 2% higher than average contributions made by non-highly compensated employees. There are consequences for failing NDTs, too. Businesses must take corrective action.

Employers sponsoring safe harbor 401(k) plans are exempt from this testing but must also satisfy certain notice requirements. Each eligible employee must be given written notice of their rights and obligations under the plan. The notice must also describe the safe harbor method in use, how they can make elections, and any other plans involved.

Choosing a Safe Harbor 401K

When considering a safe harbor 401(k) plan, employers should:

Evaluate costs vs. benefits:

  • Calculate the required contribution costs across all eligible employees.
  • Compare these costs to the potential tax benefits and reduced administrative burden.
  • Consider the value of allowing HCEs to maximize their contributions.

Select the appropriate contribution formula:

  • Matching formulas incentivize employee participation but only require contributions for employees who defer.
  • Non-elective contributions are simpler but require contributing for all eligible employees regardless of participation.

Consider timing:

  • For new plans, establish by October 1 for the current calendar year.
  • For existing plans, implement safe harbor provisions at the beginning of the plan year.

Prepare for communication requirements:

  • Develop the required annual notice.
  • Create an employee education strategy to maximize participation.

Review plan design options:

  • Determine eligibility requirements (cannot be more restrictive than one year of service and age 21).
  • Consider adding auto-enrollment features.
  • Explore additional plan features like Roth options or profit-sharing components.

Consult with experts:

  • Work with retirement plan professionals, Employee Retirement Income Security Act (ERISA) attorneys, or third-party administrators.
  • Ensure proper documentation and compliance.

How Paycor Helps Establish Safe Harbor 401(k) Plans

Paycor offers automated retirement services plan administration with leading integration partners, including Principal, Fidelity, John Hancock, and Transamerica. In addition, we help our clients stay ahead of compliance regulations, whether they be for tax, benefits, or recruitment.

With Paycor Benefits Administration software, you can simplify open enrollment, receive automated alerts, and increase efficiency. See Paycor’s solutions in action with a guided tour.

Safe Harbor 401(k) Plan FAQs

Still have 401(k) questions? Read on.

Can Safe Harbor 401(k) Plans Fail?

Yes. While safe harbor plans are designed to bypass certain testing requirements, they can still fail if employers don’t meet contribution requirements, fail to issue the annual notice on time, or apply contributions incorrectly.

What Happens if a Safe Harbor 401(k) Plan Fails?

Failure to comply with safe harbor rules may trigger nondiscrimination testing and IRS penalties. Employers might need to make corrective contributions, issue refunds, or amend the plan to remain in compliance.

At What Age is 401(k) Withdrawal Penalty-Free?

Withdrawals from a 401(k) are penalty-free only after age 59.5 and if the account has met certain conditions. Required minimum distributions (RMDs) begin at age 73 (for most individuals), and early withdrawals are typically subject to a 10% penalty plus income tax.