A safe harbor 401(k) plan helps employers avoid most annual nondiscrimination tests while making sure all eligible employees have the opportunity to get an employer contribution. This article explains how safe harbor plans work, the contribution formulas available, key deadlines, and how to make changes to your plan.
A safe harbor 401(k) is a type of employer-sponsored retirement plan that benefits both employees and employers. For employees, safe harbor plans make sure all eligible participants have the opportunity to get an employer contribution. For employers, meeting safe harbor requirements means your plan automatically satisfies most IRS-required annual nondiscrimination tests — avoiding the potential costs and complications of failing those tests.
There are two types of safe harbor plans: traditional and qualified automatic contribution arrangement (QACA). Each has different contribution formulas, automatic enrollment requirements, and vesting rules.
Traditional and QACA are the two types of safe harbor plans, each with different contribution, enrollment, and vesting rules.
A traditional safe harbor plan requires a specific employer contribution formula, immediate vesting of safe harbor contributions, and specific notices to employees.
Automatic enrollment is optional for traditional safe harbor plans that qualify for an exemption to the mandatory automatic provisions (MAP) under the SECURE 2.0 Act. For plans that do not qualify for a MAP exemption, an eligible automatic contribution arrangement (EACA) is required with a default deferral rate of at least 3% but no more than 10%, plus automatic escalation of at least 1% per year until reaching at least 10% (and no more than 15%).
Note: All Gusto Retirement plans include automatic enrollment regardless of plan type or MAP status.
A QACA safe harbor plan differs from a traditional plan in that it needs to include both automatic enrollment and automatic escalation, regardless of when it was established or whether it qualifies for a MAP exemption.
QACA plans allow for slightly lower employer matching contributions and permit a vesting schedule on safe harbor contributions of up to two years, making them potentially less costly and useful for employee retention. The default deferral rate needs to be at least 3% but no more than 10%.
Automatic escalation minimums for QACA plans:
MAP-exempt plans: deferral rate needs to increase by at least 1% per year until reaching at least 6% (no more than 15%)
Plans not exempt from MAP: deferral rate needs to increase by at least 1% per year until reaching at least 10% (no more than 15%)
Safe harbor plans need employers to make contributions following a specific formula. There are three formulas: basic match, enhanced match, and nonelective contribution. The amounts differ depending on whether you have a traditional or QACA plan.
Traditional: Your company matches 100% of employee deferrals up to 3% of their compensation, plus 50% of the next 2%.
QACA: Your company matches 100% of employee deferrals up to 1% of their compensation, plus 50% of the next 5%.
The enhanced match needs to be at least as generous as the basic match at each deferral level and cannot be based on a deferral that exceeds 6% of compensation.
Traditional: The most common enhanced match is 100% of deferrals up to 4% of compensation.
QACA: The most common enhanced match is 100% of deferrals up to 3.5% of compensation.
Your company contributes at least 3% of each employee's compensation — regardless of whether the employee personally contributes to the plan. This means every eligible employee gets the employer contribution each pay period, even if they are not personally deferring.
Note: For traditional safe harbor plans, the minimum nonelective contribution may be 4%, depending on the timing of the election.
With Gusto Retirement, the minimum employer contribution to qualify for safe harbor status is 3% of employee compensation.
Safe harbor contributions need to be made for all employees who are eligible to participate in the 401(k) plan. You can limit eligibility by setting minimum age or length of service requirements — but at Gusto Retirement, eligibility requirements need to be the same across all contribution sources.
The automatic escalation provision applies only to employees who are automatically enrolled. The safe harbor contribution, however, needs to be made for all employees eligible to get a contribution under the plan.
The IRS requires nondiscrimination testing after the end of each plan year to confirm 401(k) plans are accessible to all employees and that benefits are fairly distributed. The three main tests are:
Actual Deferral Percentage (ADP) test
Actual Contribution Percentage (ACP) test
Top-heavy test
If a plan fails these tests, employers may face correction costs, and highly compensated employees (HCEs) may be limited in how much of their contributions can stay in the plan.
Because safe harbor plans make sure all eligible participants have equal contribution opportunities, they automatically satisfy the ADP test. The ACP and top-heavy tests are also automatically satisfied in most cases. However, if you make discretionary contributions — like profit sharing — in addition to safe harbor contributions, the top-heavy test will apply, and additional minimum contributions may be required if the plan is top-heavy.
Your deadline depends on whether you're starting a new safe harbor plan or adding safe harbor to an existing plan.
Oct. 1 is the final deadline to start a new safe harbor 401(k) for the current plan year. Because employees need to get notice at least 30 days before the plan starts and setup takes time, we recommend starting setup by Aug. 15.
To add a safe harbor provision to an existing plan, contact us before Nov. 20 — the change will take effect Jan. 1 of the following year. Employees need to get notice 30 days before the effective date.
If you miss the November deadline, you may be able to add traditional safe harbor mid-year in some circumstances. See the section below for details.
Note: A QACA safe harbor provision cannot be added after Jan. 1 under any circumstances, even if the plan already has an EACA automatic enrollment provision. Once a safe harbor design is in effect, it needs to apply for the entire plan year.
Changes to safe harbor plans should generally be made before the start of the plan year. However, some mid-year adjustments are allowed depending on the type and timing of the change. Any mid-year change needs to be reviewed to confirm it is allowed under safe harbor rules, and a supplemental safe harbor notice is often required.
Reduce or suspend safe harbor contributions
You can reduce or stop your safe harbor employer contribution mid-year if at least one of the following is true:
Your business is operating at an economic loss
The safe harbor notice provided to employees before the plan year includes a statement that contributions may be reduced or suspended mid-year — Gusto Retirement safe harbor notices include this statement automatically
If you reduce or suspend contributions, a 30-day notice needs to be sent to participants before the change takes effect. You need to continue making safe harbor contributions through the effective date of the change.
Important: Reducing contributions outside of these conditions results in a loss of safe harbor status for the entire plan year — including the period when safe harbor contributions were made. Before ending safe harbor, consider whether your plan is likely to fail nondiscrimination testing as a result. In many cases, the cost of safe harbor contributions is less than meeting top-heavy contribution requirements. Once safe harbor status is removed, you generally cannot re-add it until Jan. 1 of the following year.
Eligibility changes
You can make mid-year changes to age and service requirements, since those changes only affect employees who have not yet become eligible. For example, increasing the minimum age from 18 to 21 would still allow anyone already eligible to participate.
You can also remove a class exclusion mid-year, which allows more employees to become eligible.
QACA vesting schedule
If your QACA plan has a vesting schedule on safe harbor contributions, you can reduce or remove it mid-year. For example, you can change from a two-year cliff schedule to immediate 100% vesting.
Increase the match formula: The safe harbor match formula cannot be increased mid-year. Gusto Retirement also does not support adding a non-safe-harbor match to a plan that already has a safe-harbor match.
Switch contribution type: You cannot move from a safe harbor match to a safe harbor nonelective contribution mid-year, or the other way around. This includes switching from a traditional safe harbor plan to a QACA safe harbor plan.
Restrict eligibility: You cannot add a class exclusion mid-year if it would cause currently eligible employees to lose eligibility.
Increase QACA vesting requirements: You cannot change from a less restrictive to a more restrictive vesting schedule.
If you missed the November deadline or want safe harbor status mid-year, it may still be possible to add a traditional safe harbor nonelective provision — depending on your current plan design. A QACA safe harbor can never be added after Jan. 1.
If your plan currently offers a discretionary employer match, we cannot add a safe harbor provision mid-year. You can request to add safe harbor for the next plan year by contacting us before Nov. 20.
If your plan does not include a discretionary employer match, you can add a traditional safe harbor nonelective contribution for the current or prior year. To be eligible:
Agree to a nonelective contribution of at least 3% before Dec. 31, or at least 4% if adding it after Dec. 31 (retroactively for the prior year)
Contributions need to be 100% immediately vested
Once adopted, the nonelective contribution takes effect immediately on a per-pay-period basis. After year-end, when compensation is confirmed, we will process a true-up to make sure all employees got the full employer contribution for the entire plan year based on their gross compensation.
Example: How a true-up works
Music Mogul, LLC has two employees — Dave and Zac — who are paid monthly. The company added a 3% nonelective traditional safe harbor contribution on Sep. 1.
Dave earns $3,000 per pay period. His gross compensation for the year is $36,000, so he is owed a total employer contribution of $1,080. Music Mogul has already contributed $360 through payrolls after Sep. 1. Dave is owed an additional $720 via true-up.
Zac earns $5,000 per pay period. His gross compensation for the year is $60,000, so he is owed $1,800 total. Music Mogul has already contributed $600. Zac is owed an additional $1,200 via true-up.
Music Mogul's total true-up is $1,920, which Gusto Retirement calculates and processes the following year after compensation is confirmed.
How to add a safe harbor provision mid-year
If you are eligible, contact our Retirement Sponsor Support team and provide your Gusto Retirement account ID along with the contribution percentage you'd like to use.
This information is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax, legal, or financial advice that considers all relevant facts and circumstances. Consult a qualified financial adviser or tax professional before relying on the information provided here.