Guide to Safe Harbor 401(k) Plans


Safe Harbor 401(k) plans have some distinct advantages that make them the most popular option for small businesses. It helps business owners and key employees maximize their own contributions while still ensuring the plan is fair for the whole team.

Why are Safe Harbor plans so popular?

It’s estimated that between 65% – 70% of small businesses choose a Safe Harbor 401(k) plan. In order to understand why these plans are so good for small companies, it’s first important to understand the annual nondiscrimination testing that is required for all 401(k) plans.

What is nondiscrimination testing?

The IRS instituted rules that businesses must follow in order to ensure retirement plans are administered to all employees fairly. Annual nondiscrimination testing is required to verify compliance.
A few different tests are used, each one weighing different aspects of plan usage. If businesses fail these tests, they need to resolve the problem somehow. This often means making restitution, such as contributing more to the accounts of non-highly-compensated employees.
Testing itself can be a hassle, and a significant expense for small businesses.

Key employees:

Anyone with 5% ownership
Anyone with 1% ownership + $150,000 in compensation
Anyone with officer status (CEO, CFO, etc.) + $215,000 in compensation

Highly-compensated employees (HCE):

Anyone with $135,000 in compensation during the prior year

Types of nondiscrimination tests

ADP: Average Deferral Percentage
The ADP test groups HCEs and non-HCEs and then compares the relative level of engagement of each group.
For each group, the average annual employee deferral rate as a percentage of total compensation is calculated. The percentage of compensation that HCEs as a group are allowed to contribute cannot be substantially higher than the same percentage for non-HCEs as a group.
Therefor, if lower-paid employees don’t contribute much to their 401(k) accounts, then neither can higher-paid employees.
ACP: Average Contribution Percentage
This test is for companies that offer matching or after-tax contributions. The groups and calculations are the same as the ADP test, but they include the employer contributions.

Top-Heavy Test

This test groups key employees and non-key employees and looks at the total account balances of both. If key employees hold more than 60% of the plan assets, the plan is considered to be top-heavy.
Therefore, key employees cannot sock away substantially more money than non-key employees.
Safe Harbor is the solution.
A Safe Harbor plan exempts businesses from nondiscrimination testing.
These plans are designed to create maximum potential for eligible employees. They require employers to contribute to employee accounts. And since the participants receive fixed contributions, the business can avoid 401(k) nondiscrimination tests altogether.
It’s a win for both employers and their workers.

Is a Safe Harbor plan right for your business?

Safe Harbor plans are a great option for many small companies, but they are not the only one. This rule of thumb can help you decide whether a Safe Harbor plan is worth your serious consideration.
If you want help deciding, just ask!

There are different types of Safe Harbor 401(k) plans.

To decide which plan type is right for your company, first answer these two questions:

Will you offer matching or non-elective contributions?
Matching contributions are made based on employee deferrals. For example, if an employee puts 10% of their income into their 401(k) account, the employer would match a certain portion of that, often 3% – 5%. But if the employee only defers 1% of their income, the employer match would also be 1%.
Non-elective contributions are given to all eligible employees, regardless of whether they defer their own income or not. They are often a fixed percentage.

Will you use a regular Safe Harbor or QACA Safe Harbor plan?

Regular Safe Harbor plans have slightly higher mandatory contribution rates, and they require that employees be immediately fully-vested.
Qualified Automatic Contribution Arrangement (QACA) plans offer more flexibility to employers. They have lower mandatory contribution rates, and allow for vesting schedules. The trade-off is that an auto-enrollment provision must be included. This provision enrolls all eligible employees, but allows them to opt out.
What Contribution Options Are Most Popular Among Business Owners?
In 2022, Employee Fiduciary studied 4,330 401(k) plans and the contribution options among each plan.

Which type is right for my business?

It can be difficult to know which type is right for you. Our plan consultants can help you make a smart choice, or you can rely on our guided setup process. Our setup wizard will take your unique needs into account and suggest the best plan design.

“Easy safe-harbor plan setup, with system helping you decide which of the 4 safe-harbor matching methods to choose. You don't need to be an expert with 401k plan design to implement a plan in literally minutes.”

-Kelly B.



Does my business have to contribute to the plan?

In exchange for the testing exemption, Safe Harbor plans require employers to provide either a matching or non-elective contribution to employees.

What is the minimum matching requirement?

QACA plans often have the lowest contribution minimum, requiring a 3.5% match when the employee contributes 6%. 

Non-elective contributions are usually just 3%, but include all employees, not just those that are participating in the plan.

Can I exclude any employees from receiving matching contributions?

Employees that match the IRS definition of a highly-compensated employee (HCE) can be excluded, but we don’t always recommend this. Discuss your specific needs with a plan consultant for more details.

Can the plan be switched from a Safe Harbor to a traditional plan as the company grows?

Yes, although there are some restrictions regarding how and when this process is completed. It’s best to discuss your intentions with your relationship manager well in advance.

What participation requirements can I set?

Safe Harbor plans must be offered to all employees who are at least 21 years old and have been employed for at least one year with at least 1000 hours of service. Your plan can set more lenient eligibility rules if you wish.

More Reading About Secure Choice Retirement Programs & Alternatives

An epidemic of under-preparedness for retirement is growing in the United States, while confidence in Social Security is shrinking. States are responding with legislation that requires businesses to offer a work-sponsored retirement program to their employees, either a private plan — such as a 401(k) — or the state-provided plan, often a Roth IRA.
While a Roth IRA can be a beneficial tool for retirement saving, these broad scale programs are far from ideal. Program details vary from state to state, so it’s wise to read the fine print.

In these articles, we discuss program details, pros and cons, and consider alternatives.
How Do Non-Elective 401(k) Contributions Work?

How Do Non-Elective 401(k) Contributions Work?

Sometimes called “profit-sharing plans,” non-elective 401(k)s can be a powerful tool for small businesses to retain good employees, reduce taxes, and help business owners prepare for their own retirement. 

401(k) Compliance: What You Need to Know

401(k) Compliance: What You Need to Know

To ensure fairness, the ERISA regulations specify best practices in establishing a 401(k) plan. Each 401(k) plan is required to perform annual nondiscrimination tests, and report on the details of the plan operation.

Why a Safe Harbor 401(k) Plan?

Why a Safe Harbor 401(k) Plan?

When it comes to selecting a 401(k) plan, you may not know where to start. You may be confused by the options, and do not know what questions to ask.