Download the 2024 Safe Harbor Guide

Download the 2024 Safe Harbor Guide

Understand new rules for 2024, benefits of Safe Harbor and strategies to minimize Safe Harbor costs.

5 min read

QACA Safe Harbor 401(k) Plans: A Simple Guide for Business Owners

David Ramirez, CFA
February 7, 2024
QACA Safe Harbor 401(k) Plans: A Simple Guide for Business Owners
Table of contents

Key Takeaways:

  • QACA Safe Harbor Plans combine lower match requirements, automatic enrollment, optional vesting
  • Benefits: Potentially lower costs, higher retention and automatically pass most nondisticrimination tests
  • Drawbacks: May lead to higher costs and best when 401(k) is integrated with payroll
  • New IRS Regulations likely make the QACA the lowest cost Safe Harbor option

As a business owner, it's crucial to understand the various retirement plan options available to you and your employees. One such option is the qualified automatic contribution arrangement (QACA) safe harbor plan. With lower Safe Harbor Match expenses, automatic enrollment and optional vesting schedule, this type of 401(k) plan offers unique features that can benefit both employers and employees. While QACA are not the most popular Safe Harbor option, we think thats about to change. Now that SECURE Act 2.0 requires automatic enrollment requirement for new plans, QACAs are likely to be one the lowest cost Safe Harbor option for plans starting in 2024.

This guide will discuss the difference between QACA and traditional safe harbor 401(k) plans. We'll also explore the requirements, benefits, and potential drawbacks of QACA safe harbor plans.

What Is a Safe Harbor 401(k) Plan?

A safe harbor plan is a 401(k) plan that requires employer contributions; a traditional 401(k) plan doesn’t require employers to contribute. The “safe” part of the plan is that it protects employers from unknowingly violating nondiscrimination requirements

With a traditional 401(k), employers must subject plans to annual nondiscrimination testing, which can be a time-consuming and complex process. Safe harbor plans are exempt from most annual nondiscrimination testing. 

What Is a QACA Safe Harbor 401(k) Plan?

A QACA safe harbor plan is a specific type of safe harbor plan that automatically enrolls employees, but gives them the ability to opt out. This type of plan originated with the Pension Protection Act of 2006, which aimed to increase worker participation in retirement plans. 

What Are the Benefits of a QACA Safe Harbor Plan? 

In addition to negating the need for most nondiscrimination testing, the benefits of safe harbor plans include: 

  • Increased plan participation: Due to its automatic enrollment feature, QACA safe harbor plans can significantly boost plan participation among employees.
  • Tax advantages: If your business is subject to corporate tax, you can deduct your employer plan contributions, thus lowering your taxable income. Employees also reduce their taxable income by contributing to the plan.
  • Simplified investment process: The automatic nature of QACA safe harbor plans simplifies the investment process for employees, encouraging higher savings rates.
  • A Safe Harbor that vests. Unlike traditional Safe Harbor plans QACA Safe Harbor plans allow employers to vest contributions up to a 2-year cliff. This can reduce QACA contribution expenses and boost employee retention.    

Why QACA Safe Harbor Plans may become the lowest cost Safe Harbor Plan in 2024

Secure Act 2.0 Makes Traditional Safe Harbor Plans more expensive

In the past, budget conscious employers often chose traditional Safe Harbor plans over QACA plans to avoid higher match costs resulting from QACA's auto enrollment requirement. However that all changed with the Secure Act 2.0 which requires that all new plans automatically enroll employees beginning in 2025. To comply, any plan started after 2022 must soon adopt a minimum default savings rate between 3% and 10%. Plans must also adopt auto-escalations of 1%, which automatically increase employee savings rate up to at least 10% (but no more than 15%). This new rule suddenly makes traditional Safe Harbor plans much more expensive.

Top 3 ways QACA Safe Harbor Plans lower employer costs

  • Lower Safe Harbor Match:  QACA Safe Harbor plans only require employers to match up to at least 3.5% of pay. Traditional Safe Harbor plans require a minimum 4% match.
  • More Favorable Match Structure: With QACA you only need to match 100% on the first 1% an employee saves, plus 50% on the next 5% saved. With traditional Safe Harbor plans you must match 100% on the first 3% they save. That means that an employee automatically enrolled at 3% employee would receive a 3% match under a traditional Safe Harbor vs. a 2% match with a QACA plan.
  • Two Year Cliff Vesting:  QACA Safe Harbor plans allow employers vest the Safe Harbor Match. Any unvested contributions can be used to cover plan costs and even fund future year matches.

What Are the Drawbacks of QACA Safe Harbor Plans?

Some potential drawbacks of a QACA plan include: 

  • Potential increased costs: With higher employee participation comes higher costs related to matching contributions. Assess these projected costs before implementing a QACA safe harbor plan.
  • Automatic enrollment: Implementing auto-enrollment may require updates to your communication materials and additional work unless your 401(k) is integrated with payroll. Businesses with a QACA safe harbor plan are also required to notify employees 30 to 90 days before the plan renews and explain contribution amounts and requirements.
  • Potential employee confusion: Employees may forget to opt out of the QACA safe harbor plan before their first contribution. 

Which is cheaper QACA or Traditional Safe Harbors?

A QACA Safe Harbor may lower Safe Harbor Match costs, especially if you expect high 401(k) enrollment or have high employee turnover.  

First, if you expect more than 88% of employees to get the full traditional match, then the lower 3.5% match requirement (compared to 4% for traditional safe harbor match) is likely cheaper.  

Second, any unvested QACA contributions can be used to subsidize company contributions in future years.  With a 2-year cliff vesting schedule, any employee that leaves the company before completing 2-years of service will forfeite their company contributions.  These forfeited contributions can be “recycled” and lower QACA contribution expenses in later years.

Requirements for QACA Safe Harbor Plans

Automatic Employee Contributions

The initial automatic employee contribution rate must be at least 3%. If the initial contribution rate is less than 6%, it must increase by at least 1% annually until it reaches 6%. Employers can set an automatic escalation cap as high as 15% per year.

Employer Contributions

As a business owner, you have to make either a QACA safe harbor match or a QACA nonelective contribution:

  • Basic match: You match 100% of the first 1% of deferred compensation and an additional 50% match on the next 5% of deferred compensation. That amounts to a 3.5% match for an employee who’s contributing 6%.
  • Enhanced match: Your match must be at least as generous as the QACA basic match at each level of the match formula.
  • Nonelective contribution: Your company contributes at least 3% of each employee's compensation, even if the employee doesn’t make contributions to the plan.

QACA vs. EACA: What’s the Difference?

Eligible automatic contribution agreements (EACAs) and QACAs both automatically enroll employees, but they differ in two important ways: 

  • EACAs offer an “unwind” option. Employees can exercise this option within the first 90 days of their automatic contribution and recoup their contribution(s) with earnings. They would, however, forfeit any employer contributions.
  • EACAs are not exempt from nondiscrimination testing. EACA plan administrators must perform annual nondiscrimination testing. However, if the plan fails testing, administrators have a grace period of six months to correct the problem before paying a penalty, instead of the 2.5-month grace period that applies to traditional 401(k) plan remediation.

Choosing the Right Plan for Your Business

A traditional safe harbor 401(k) plan may be suitable if you want a straightforward plan with immediate vesting of employer contributions and don't want an automatic enrollment feature. Conversely, a QACA safe harbor plan could be a better fit if you want to encourage higher employee participation, can handle the administrative work of implementing automatic enrollment, and don’t want to go through annual nondiscrimination testing.

By understanding the pros and cons of 401(k) plan options, you can make an informed decision that serves the best interests of your business and your employees. Always consult with your plan advisor, attorney, or accountant to ensure you choose the most suitable plan for your business.

ForUsAll is happy to answer any questions you have about choosing and managing a plan — and we can even administer your plan for you.  


Can I reduce or suspend matching contributions for a QACA safe harbor plan?

If you’re operating at a financial loss and meet several criteria, you may be able to pause or reduce your matching contributions. However, any changes must be uniformly applied to all plan participants. 

What are the benefits of matching employee contributions? 

Matching employee contributions is an additional cost for your business, but it also reduces your taxable business income. And offering matching contributions could help you recruit and retain top talent.

Is a QACA safe harbor plan only for large businesses?

No — a QACA plan is suitable for small and medium businesses, too.

Do I have to wait until the start of the year to set up a QACA safe harbor plan? 

The rule for establishing a safe harbor plan with a match is that you give employees the ability to make three months of contributions in a calendar year. So you can set up a new plan at any time, as long as it’s live by October 1. 

Are there any tax credits for setting up a 401(k) plan? 

Employers with 100 or fewer employees may be eligible for a tax credit of up to $5,000 for setting up a plan.

Download the 2024 Safe Harbor Guide
Understand new rules for 2024, benefits of Safe Harbor and strategies to minimize Safe Harbor costs.
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About Author -
David Ramirez, CFA

David Ramirez, CFA, is a recognized 401(k) expert with over 20 years of experience in 401(k), ERISA, cash balance plans, and ESOPs. A UC Berkeley graduate, he played a pivotal role at Financial Engines, a 401(k) advisory firm founded by Nobel Laureate William Sharpe, Ph.D., where he was a portfolio manager who helped manage over $50B in 401(k) assets.  His clients included some of the largest Fortune 500 companies and state governments.

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1 Schwab 2022 401(k) Participant Study - Gen Z/Millenial Focus, October 2022.
2 As of 12/31/2022. Employees include both current employees and terminated participants with a balance.
3 "Morgan Stanley At Work: The Value of a Financial Advisor" Morgan Stanley, March 2022.
4 Sarah Britton was a client when she provided this testimonial through an independent third party review website. She received no compensation for her remarks. There are no known conflicts of interest in the provision of her comments related to the services provided.