If you're deciding between a traditional safe harbor 401(k) and a qualified automatic contribution arrangement (QACA) safe harbor plan, this article walks you through how each one works and how they compare. Gusto Retirement offers both plan types.
A safe harbor 401(k) lets small business owners offer employees retirement accounts with less concern about Internal Revenue Service (IRS) nondiscrimination testing — the annual checks that make sure a plan does not unfairly favor higher-paid employees. Safe harbor plans automatically satisfy most IRS nondiscrimination tests, including the actual deferral percentage (ADP) test and, in some cases, the actual contribution percentage (ACP) and top-heavy tests if certain other conditions are met.
To get this benefit, safe harbor plans need to meet certain requirements, like making employer contributions to employees' accounts. A safe harbor match also encourages all employees to contribute and take advantage of the plan.
There are generally two types of safe harbor plans — traditional and QACA.
A traditional safe harbor plan uses a specific formula for employer contributions, requires that the contributions vest immediately, and requires that specific notices go to employees.
Only certain traditional safe harbor plans need to include automatic enrollment, but all Gusto Retirement plans include an automatic enrollment feature. Find out why we believe in the power of automatic enrollment for employers and employees alike.
Traditional safe harbor plans established on or after December 29, 2022, that do not meet an exception to the mandatory automatic provisions (MAP) under the SECURE 2.0 Act need to include an eligible automatic contribution arrangement (EACA) with a default rate of at least 3% but not more than 10%. They also need an automatic escalation provision, which increases the deferral rate of automatically enrolled employees by 1% each year until they reach the level stated in the plan document — at least 10% but no more than 15%.
For traditional safe harbor plans established before December 29, 2022, or that meet at least one of the MAP exceptions and include an automatic enrollment provision, the default deferral rate can be as low as 1%, and automatic escalation is not required.
A QACA safe harbor plan differs from a traditional safe harbor plan because it needs both automatic enrollment and automatic escalation, no matter when the plan was established or whether it meets a MAP exception. QACA plans also allow slightly lower employer matching contributions and permit a short vesting schedule for the employer safe harbor contributions.
Because QACA plans require a lower employer match as a percentage of employee deferrals, they can be less costly for employers who still want the benefits of safe harbor status. QACA plans may also help with employee retention, since you can apply a vesting schedule.
For all QACA plans, the default deferral rate has to be at least 3% but no more than 10%. The automatic escalation requirement depends on when the plan was established:
For plans established on or after December 29, 2022, that do not meet an exception to the MAP under the SECURE 2.0 Act, the automatic escalation provision needs to go to at least 10% but no more than 15%
For plans established before December 29, 2022, or that meet at least one of the MAP exceptions, the automatic escalation provision needs to go to at least 6% but no more than 15%
Traditional safe harbor
QACA safe harbor
Automatic enrollment¹
Optional. Plans exempt from MAP — no minimum. Plans not exempt from MAP — 3% minimum.
Required. 3% minimum deferral rate.
Automatic escalation
Plans exempt from MAP — optional. Plans not exempt from MAP — required. Rate needs to increase by at least 1% each year to at least 10%, but not exceed 15%.
Plans exempt from MAP — required. Rate needs to increase by at least 1% each year to at least 6%, but not exceed 15%. Plans not exempt from MAP — required. Rate needs to increase by at least 1% each year to at least 10%, but not exceed 15%.
Employer contributions — matching
Basic match: 100% of the first 3% of employee deferrals, plus 50% from 3% – 5% of employee deferrals, for a maximum 4% match. Enhanced match: at least 100% of the first 4% of employee deferrals, but cannot provide matching for deferrals over 6%.
Basic match: 100% up to 1% of employee deferrals, plus 50% from 2% – 6% of deferrals, for a maximum 3.5% match. Enhanced match: at least as much as the QACA basic match at each tier of the formula, but cannot provide matching for deferrals over 6%.
Employer contributions — nonelective
Employers contribute a minimum of 3% of each eligible employee's annual compensation, whether or not the employee contributes to the plan.
Same as traditional safe harbor.
Vesting requirements on safe harbor contributions
100% immediate vesting required.
Permits up to a two-year cliff or graded schedule.
ADP testing
Automatically satisfied.
Same as traditional safe harbor.
ACP and top-heavy testing²
Automatically satisfied if certain conditions are met.
Same as traditional safe harbor.
IRS safe harbor notice requirement
Notices go to all plan participants before initial plan eligibility (but no more than 90 days before eligibility) and at least 30 days (and no more than 90 days) before the start of each plan year. No notice requirement for non-elective plans.
Same as traditional safe harbor. The notice also needs to include certain automatic enrollment, automatic escalation, and investment information.
Note: When a cell reads "Same as traditional safe harbor," the same rules apply to both plan types.
Current IRS guidelines only allow a plan to switch between a traditional and QACA safe harbor at the start of a plan year. In general, traditional and QACA safe harbor plans follow the same rules for mid-year changes.
This content is for informational purposes only and is not intended to be construed as tax advice. You should consult a tax professional to determine the best tax-advantaged retirement plan for you.
¹ All Gusto Retirement plans include an automatic enrollment feature.
² Safe harbor 401(k) plans generally automatically satisfy ACP and top-heavy requirements, except for plan years in which the employer makes discretionary contributions (like profit-sharing contributions) in addition to safe harbor contributions.