Safe Harbor 401(k) Plans: FAQs for Small Businesses

Is your small business overwhelmed by annual 401(k) nondiscrimination testing? A safe harbor 401(k) plan can automatically satisfy the ADP/ACP and top-heavy nondiscrimination tests when certain employer contribution and participant notice requirements are met. That means no corrective refunds to Highly Compensated Employees (HCEs), no surprise top heavy minimum contributions, and more predictable budgeting—all while giving you an edge in recruiting talent.

We get a lot of questions from small business owners about safe harbor 401(k) plans. Here are answers to the most important questions we receive. They reflect changes made by the SECURE Act of 2019 (SECURE 1.0) and SECURE Act of 2022 (SECURE 2.0).

What Makes a 401(k) Plan “Safe Harbor”?

To achieve safe harbor status, a 401(k) plan must meet the following requirements:

• • Mandatory Employer Contributions: Employer must provide employees with either a matching or nonelective contribution at IRS‑prescribed minimums.
  • Employer Contribution Vesting: Safe harbor matching or nonelective contributions must be subject to accelerated vesting requirements.
  • Notice Requirements: Some plans have a notice requirement to inform plan participants about their rights and obligations under the plan.

Why Choose a Safe Harbor 401(k) over a Traditional Plan? 

Businesses choose a safe harbor 401(k) over a traditional (non-safe harbor) plan to eliminate the uncertainty and administrative burden of nondiscrimination testing. By meeting safe harbor standards, employers gain budgeting certainty and confidence that business owners – and other key employees – can maximize their personal contributions annually.

What Are My Safe Harbor Plan Design Options?

Safe harbor 401(k) plans come in two basic designs today - classic and Qualified Automatic Contribution Arrangement (QACA). These designs have different contribution requirements.

Classic Safe Harbor

• • Automatic Enrollment: Required for plans established on or after December 29, 2022 (the effective date of SECURE 2.0), unless an exemption applies. Optional for older plans.
  • Employer Contributions: Employers must make one of the following contributions to plan participants:
    • Basic Match: 100% of first 3% of compensation + 50% of next 2%.
    • Enhanced Match: must equal or exceed the basic match at each tier. 100% of first 4% of compensation is most common.
    • Nonelective Contribution: 3% of compensation (or more) for all plan participants.
  • Vesting: Safe harbor contributions must be 100% vested. No vesting schedule can apply.

QACA Safe Harbor

• • Automatic Enrollment: Required for all QACA plans.

• • Employer Contributions: Employers must make one of the following contributions to plan participants:
    • Basic Match: 100% of first 1% of compensation + 50% of next 5%.

• • • Enhanced Match: must equal or exceed the basic match at each tier. 100% of first 3.5% of compensation is most common.
    • Nonelective Contribution: 3% of compensation for all plan participants.
  • Vesting: Up to a two‑year vesting can apply to safe harbor contributions.

Due to SECURE 2.0’s automatic enrollment mandate, the QACA will likely become dominant design choice for startup (new) plans given its more flexible contribution requirements.

What Eligibility Requirements Apply to Safe Harbor Plans?

Safe harbor 401(k) plans generally follow the same eligibility rules as traditional 401(k) plans, with employers defining criteria that employees must meet to participate. Once employees meet these requirements, they must be eligible for all safe harbor contributions (match or nonelective) without additional allocation conditions (e.g., 1,000 hours of service, employment on the last day of the year). HCEs are an exception. This employee group can be excluded from safe harbor contributions.

Can a Discretionary Match Be Made to a Safe Harbor Plan?

Yes, employers may make a discretionary match to a safe harbor plan in addition to the required matching or nonelective contribution. However, for the plan to not lose its safe harbor status, the match must meet certain conditions. These conditions include:

• • The formula cannot be based on more than 6% of compensation.
  • The amount cannot exceed 4% of compensation.
  • The rate must be uniform. It cannot increase as deferral rates increase.
  • Allocation conditions (e.g., 1,000 hours of service, employment on the last day of the year) cannot apply.

Can a Profit Sharing Contribution Be Made to a Safe Harbor Plan?

Yes, employers may make a profit sharing contribution to a safe harbor plan in addition to the required matching or nonelective contribution. These contributions can be allocated to plan participants using various formulas to meet specific plan goals. Some of the most common formulas include:

• • Pro Rata: All plan participants receive the same contribution rate. This is the simplest and most equitable method.
  • Integrated: Plan participants with earnings above the plan’s “integration level” – which is based on the Social Security taxable wage base limit in effect for the year - receive a higher contribution rate.
  • New Comparability: Contribution is allocated to plan participants based on groups (such as job class or ownership status). Formula is used to provide a higher contribution rate to select groups—typically HCEs—while passing nondiscrimination testing.

What Participant Notice Requirements Apply to Safe Harbor Plans?

The participant notice requirements for safe harbor 401(k) plan depends upon whether the plan uses a matching or nonelective contribution to meet safe harbor requirements.

Requirement for Match-Based Plans

All match-based plans must distribute a safe harbor notice to plan participants. If the plan automatically enrolls employees unless they opt out, an automatic enrollment notice must also be distributed.

Requirement for Nonelective-Based Plans

Thanks to SECURE 1.0, nonelective-based plans have no notice requirement unless the plan includes one or more of the following features:

• • Automatic Enrollment: The plan automatically enrolls employees unless they opt out.
  • Additional Match: The plan makes a matching contribution in addition to the required nonelective contribution.
  • "Maybe" Contribution: The plan has a contingent (or "maybe") nonelective contribution.

Timing Requirement for Safe Harbor Notices

When applicable, a safe harbor notice must be distributed to plan participants within a reasonable period before the start of each plan year. In general, “reasonable” means:

• • 30-90 days before the start of each plan year.
  • For new participants, generally no earlier than 90 days before their plan entry date and no later than that date.

What is a “Maybe" Safe Harbor Nonelective Contribution? 

A contingent (or "maybe") nonelective contribution allows an employer to reserve the right to decide during the plan year whether to provide the required nonelective contribution or not. Here’s how it works:

• • Maybe Notice: 30-90 days before the start of the plan year, the employer distributes a "maybe notice" to inform all plan participants that a nonelective contribution may be made.
  • Follow-up Notice: If a nonelective contribution will be made, the employer distributes a follow-up notice no later than 30 days before the last day of the plan year to inform plan participants.

If the nonelective contribution is not made, the plan becomes subject to ADP/ACP and top-heavy testing for the year.

By using a "maybe" nonelective design, employers gain flexibility to assess financial conditions before committing yet retain the ability to secure safe harbor relief without risking failed nondiscrimination tests.

Can a Safe Harbor Plan be Amended Mid-Year?

Yes, but with certain exceptions. If the amendment affects the content of the previously provided safe harbor notice, a new notice must be sent within a reasonable time before the amendment’s effective date.

• • 30 to 90 days before the effective date is deemed reasonable.
  • Employees must be given a reasonable opportunity to change their deferral election before the amendment’s effective date.

The following are prohibited mid-year changes:

• • Increasing the number of years required for full vesting of QACA safe harbor contributions.
  • Reducing the number or otherwise narrowing the group of employees eligible to receive safe harbor contributions if the employees have already met the existing eligibility conditions.
  • Changing the type of safe harbor plan (e.g., classic safe harbor to QACA safe harbor).
  • Modifying a match formula that increases contributions or adding a discretionary match within three months of year-end. A change made prior to the three-month deadline must be retroactive to the beginning of the plan year.

Can Safe Harbor Contributions Be Reduced or Suspended Mid-Year?

Yes. A safe harbor match or nonelective contributions (as applicable) can be reduced or suspended mid-year when all of the following conditions are met:

• • Either of the following conditions apply:
    • The plan sponsor is operating at an economic loss.
    • The safe harbor notice provided before the start of the plan year states that contributions can be suspended mid-year.
  • A supplemental notice is distributed to plan participants at least 30 days before the effective date of the reduction or suspension.
  • Plan participants have a reasonable opportunity to change their deferral election before the reduction or suspension occurs.
  • The plan becomes subject to ADP/ACP and top-heavy testing for the full plan year.
  • The plan meets the safe harbor requirements for compensation paid through the effective date of the reduction or suspension.
  • The reduction or suspension is effective no earlier than the later of:
    • 30 days after the supplemental notice if provided to employees; or
    • The date the amendment is signed.

When Can I Adopt a Safe Harbor Plan?

SECURE 1.0 and 2.0 liberalized the deadlines for adopting a new safe harbor plan, converting an existing plan to a safe harbor plan, or replacing a SIMPLE IRA with a safe harbor plan.

• • Adopting a New Plan: The first year of a new safe harbor plan must be at least 3 months long. That means the deadline to adopt a new calendar-based plan is October 1.
  • Converting to a Match‑Based Plan: The amendment deadline is the last day of the year preceding the year in which the plan will become safe harbor, while the notice deadline is 30–90 days before start of the plan year in which the plan will become safe harbor.
  • Converting to a Nonelective Plan: Deadline depends upon the amount of the nonelective contribution:
    • Less than 4%: Up to 30 days before the close of the plan year in which the plan will be safe harbor.
    • 4% or greater: The last day of the plan year following the plan year in which the plan will be safe harbor (i.e., the deadline for distributing ADP/ACP corrective refunds).
  • Replacing a SIMPLE IRA with a safe harbor plan: SIMPLE IRAs must be the sole retirement plan maintained by an employer. The soonest an employer can replace a SIMPLE IRA with a safe harbor plan will depend upon the termination date of the SIMPLE IRA.
    • December 31 Termination Date: All SIMPLE IRAs operate on a calendar year basis. Assuming an employer terminates a SIMPLE IRA on December 31, they can adopt a replacement safe harbor plan as soon as the next day (January 1) without conditions.

• • • Mid-Year Termination Date: SECURE 2.0 allows employers to terminate SIMPLE IRA prior to December 31 by replacing that plan with a safe harbor plan “as of the day after” the SIMPLE IRA’s termination date and meeting special participant notice and contribution limit requirements.

What Tax Incentives Apply to Safe Harbor Plans?

• • Small Business Tax Credits: SECURE 2.0 significantly enhanced the tax credits available to eligible small businesses that start a new plan, add an auto-enroll feature, or make employer contributions to employees:
    • Startup Credit: 50% of qualified startup costs (max $5,000/year for three years).
    • Auto‑Enrollment Credit: 50% of auto‑enrollment costs (max $500/year for three years).
    • Employer Contribution Credit: 100% credit for up to $1,000 per non‑HCE contribution for the first five years.
  • Tax Deductions: Plan contributions are deductible under IRC §404, while other plan costs are tax-deductible as business expenses.

Ready to Turn Compliance into a Competitive Advantage?

Safe harbor 401(k) plans do more than just check the IRS boxes—they give small businesses a predictable, worry-free way to reward employees, streamline administration, and stand out in a tight talent market. Whether you’re launching your first retirement plan or upgrading from a SIMPLE IRA, now’s the time to leverage SECURE Act 2.0 enhancements and lock in tax credits that can cut your costs by thousands.