How Do Safe Harbor 401(k)s Work?

How Do Safe Harbor 401(k)s Work?

September 20, 2022

Sponsoring an employee retirement plan is a balancing act. Business owners want to provide a compelling benefit that will attract and retain key employees, but in a way that isn’t too costly or overbearing to the company.

One such plan that can meet these needs is the safe harbor 401(k). Despite its convenience, it can be difficult to sort through rules to make sure your plan remains compliant. At DCS Pensionmark, we can help you sort through the details. In this guide, we’ll explore the pros and cons of the safe harbor 401(k) and how to decide if it’s the right option for you.

What Is a Safe Harbor 401(k)?

A safe harbor 401(k) is named after the “safe harbor” provision in the tax code which states that certain approved conduct will be considered compliant in place of a particular rule or requirement. In this case, a safe harbor 401(k) plan will be exempt from annual nondiscrimination testing as long as the employer makes fully vested contributions to every eligible employee’s account. (1)

Plan sponsors can choose which type of safe harbor plan they would like to adopt, which provides flexibility in finding a plan that fits your needs.

Basic Safe Harbor Match (2)

In a basic safe harbor match, employers must match 100% of employee contributions on the first 3% of compensation, then 50% of contributions on the next 2% of compensation. The matching contributions are limited to employees who are actively deferring funds into the plan. This means you could contribute to fewer employees, but you will probably contribute more per person.

Non-Elective Safe Harbor (3)

With this plan, employers will contribute 3% of all eligible employees’ salaries, regardless of whether the employees contribute themselves. In this case, you would contribute to a greater number of employees but less per person.

Qualified Automatic Contribution Arrangement (QACA) (4)

This plan is also known as a safe harbor plan with an automatic enrollment feature. It is used to automatically enroll employees into the plan at a savings rate of 3%. The employer can then choose to make matching contributions or non-elective contributions at a reduced rate.

The QACA match plan requires employers to match 100% of contributions on the first 1% of employee compensation, then 50% of contributions on the next 5% of compensation. The QACA non-elective plan, on the other hand, requires employers to contribute 3% of compensation to all eligible participants.

Both plans require that employer contributions fully vest after two years, which is more favorable to plan sponsors and can be used to promote employee retention.

Advantages of a Safe Harbor 401(k)

There are many benefits to a safe harbor 401(k) plan, including:

Generally exempt from annual nondiscrimination testing: A safe harbor plan is generally considered compliant with the major annual tests (ADP, ACP, and top-heavy) as long as the mandatory contribution levels are met. (5) This alleviates a significant administrative burden and expense on the plan sponsor’s side. Keep in mind that if the plan sponsor decides to add a discretionary match at year-end, there would be additional nondiscrimination testing required. (6)
Increased contributions: Since safe harbor plans are generally not tested for nondiscrimination, employers and highly compensated employees can contribute more to their accounts without fear that the plan will be considered non-compliant. Again, this only applies if the employer does not offer an additional discretionary match.
Tax-deductible contributions: Like other 401(k) plans, employer contributions are tax-deductible up to 25% of covered compensation paid, limited to $305,000 of compensation per employee. (7)
Attract & retain employees: The required employer contributions are an attractive benefit to employees who are looking for long-term stability and growth within the company. This can help your business be more competitive when it comes to attracting and retaining top prospects.

Disadvantages of a Safe Harbor 401(k)

While the benefits of a safe harbor 401(k) are enticing, it’s important to keep the cons in mind as well:

Costly contributions: Choosing a safe harbor plan means you will be required to make employer contributions either every pay period or at the end of each plan year. These can quickly add up, especially if you have a lot of eligible employees and there is no flexibility for years in which your company’s cash flow may be struggling. If you don’t keep up with the contributions, your plan could lose its tax-qualified status, resulting in hefty fines and penalties.
Immediate vesting: Unless you choose the QACA plan, safe harbor plans require immediate vesting of employer contributions. That means employees will automatically be entitled to 100% of the funds should they resign or be terminated. Immediate vesting is enticing for employees since all the money contributed is portable, but this portability can be a double-edged sword if employees decide to leave the company.
Annual administrative requirements: Safe harbor plans (other than the nonelective safe harbor plan) must deliver notice to plan participants every year, at least 30 days before the plan year ends. This notice must detail each employee’s rights and obligations under the plan. (8) Ensuring that notices are sent in a timely fashion can add an administrative burden to the plan sponsor.
Making the Right Choice
Choosing the right retirement plan offering, whether it’s a traditional 401(k) or a safe harbor plan, comes down to several factors, including employee count and demographic, participation levels, company cash flow, previous compliance issues (if any), and desired plan design.

At DCS Pensionmark, we help retirement plan sponsors sort through these factors to determine the right choice for their employees and their companies. If you are considering a safe harbor 401(k) and would like more information on the pros and cons, reach out to us at

About Dan

Dan Shapiro is a retirement plan advisor and holds the Accredited Investment Fiduciary® and Certified Plan Fiduciary Advisor certifications. With over 30 years of experience in the industry, Dan guides his clients through the entire retirement plan process, from plan design to compliance to investment oversight. His goal is to provide his plan sponsor clients with the ability to offer the right retirement plan the right way to their employees—a plan they can be proud of. He is one of the original 100 Accredited Investment Fiduciary® practitioners in the United States and uses his knowledge and experience to implement best fiduciary practices to ensure employees have appropriate investments to choose from and employers have a well-documented fiduciary process in place to mitigate risk. Dan is known for taking the time to understand his clients’ unique goals and situations and applying his holistic approach to customize and develop tailored strategies to improve outcomes and take some of the plan sponsor burden off their shoulders.

When he’s not working, you can find Dan at the park and marina near his house training his Australian Shepherd. He cherishes his frequent FaceTime calls with his grown children who live in Israel. In fact, Dan and his wife, Rita, consider their proudest life achievement to be raising their two children, Ashley and Joshua, to be productive and principled adults. Dan and Rita love to entertain, especially when it includes making great food with the smoker and barbeque. To learn more about Dan, connect with him on LinkedIn.

Pensionmark Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).


(1) Internal Revenue Service. (2021, November 15). 401(k) Plan Overview.

(2) Paychex. (2022, January 10). Is a Safe Harbor 401(k) Right for You?

(3) Paychex. (2022, January 10). Is a Safe Harbor 401(k) Right for You?

(4) Internal Revenue Service. (2022, May 17). FAQ – Auto Enrollment.

(5, 6, 7 ) Internal Revenue Service. (2021, November 15). 401(k) Plan Overview.

(8) Internal Revenue Service. (2022, January 20). Notice Requirement for a Safe Harbor 401(k).