Download the 2023 Safe Harbor Guide

Download the 2023 Safe Harbor Guide

Understand new rules for 2023, benefits of Safe Harbor and strategies to minimize Safe Harbor costs.


Safe Harbor 401(k): 2023 Guide For Employers

October 16, 2023
8 min read
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Key takeaways:

Key Takeaways:

  • Safe Harbor plans allow you to automatically pass non-discrimination tests
  • Safe Harbor plans are great for family-owned businesses and plans with low participation.
  • Employers can choose between a Safe Harbor Match (4%) or Safe Harbor non-elective contributions (3%).
  • The right Safe Harbor design can help owners safe on taxes
  • Secure Act tax credits may cover up to 100% of employer costs and greatly subsidize Safe Harbor contributions

This article includes the highlights of our white paper: 2023 Definitive Guide to Safe Harbor 401(k) Plans. For a deep dive into Safe Harbor 401(k) plans download the full white paper.

Navigating the world of retirement plans can be overwhelming, especially when deciding between traditional 401(k) plans and Safe Harbor 401(k) plans. In this blog post, we'll discuss the benefits of Safe Harbor 401(k) plans and guide you through setting one up for your small business.

How to choose a Safe Harbor Plan Design

What is a Safe Harbor plan?   

% of plans with a Safe Harbor design

A Safe Harbor Plan is a popular option for small businesses that want to offer an exciting 401(k) that is easy to administer. If a plan includes the following Safe Harbor provisions, they automatically pass non-discrimination tests: 

In 2022, more than 1 out of 3 employers chose to offer a Safe Harbor plan because they are easy to administer and popular with employees (according to Vanguard).

Avoid Nondiscrimination Tests 

Nondiscrimination test overview

Traditional 401(k) plans must pass annual compliance tests (IRS annual nondiscrimination tests). If businesses fail these tests, they may need to refund money, make unexpected contributions to employees, or both. 

Safe Harbor plans automatically pass these tests. However, the “free pass” can be expensive – employers need to make at least a 3% contribution to their employees’ accounts. 

Nondiscrimination tests basically separate your team into two groups: 

  1. Owners, highly paid execs (“Key Employees”) and highly compensated employees (“HCEs”)
  2. Everyone else (NHCEs).  

To pass these tests, both groups need to join and save into the plan at roughly similar rates.  But let’s look at the details.

New 2023 Limits For Key Employees and Highly Compensated Employees

The IRS changes income limits for Key Employees and HCEs periodically, and in 2023, income limits for Officers and highly compensated non-owners increased by $15,000 to $215,000 and $150,000, respectively.

2022 2023
Key Employee Officer making over $200K
More than 5% owner
1% owner making over $150k
Officer making over $215K
More than 5% owner
1% owner making over $150k
Highly Compensated Employee (HCE) Anyone making over $135k
More than 5% Owner
Anyone making over $150k
More than 5% Owner

Actual Deferral Percentage (ADP) /Actual Contribution Percentage (ACP) Tests

The ADP and ACP tests compare how much highly compensated employees (HCEs) save relative to non-highly compensated employees (NHCEs). While the “Actual Deferral Percentage” (ADP) test compares the average amount employees save, the “Actual Contribution Percentage” (ACP) test compares how much each group receives in company contributions. As the limits below suggest, the ADP and ACP for HCEs and NHCEs need to be pretty close.

2023 ADP and ACP Test Limits

If ADP/ACP for NHCEs is: then HCE's ADP/ACP cannot exceed
< 2% NHCE% x 2
2% > NHCE% < 8% NHCE% + 2%
NHCE% > 8% NHCE% x 1.25

If a plan fails these tests, HCEs may have their contributions returned or the employer must make an additional contribution to NHCEs.  

Top heavy test

The top-heavy test looks at the proportion of total plan assets owned by Key Employees. If more than 60% of plan assets are held by Key Employees, then the plan is likely top-heavy. Plans that fail the top-heavy test, may have to contribute up to 3% to every non-key employee.

How to correct failed nondiscrimination tests

Types of Safe Harbor plans

Many employers choose a Safe Harbor plan so that they can avoid the headaches and risks of annual nondiscrimination tests. There are several types of Safe Harbor 401(k) plans, each with its own unique features and requirements, one thing they have in common is you need to decide between a Safe Harbor Match and a Safe Harbor Non-elective contribution.

Traditional Safe Harbor: 

A traditional Safe Harbor plan requires employers to contribute between 3% and 4% of eligible employee pay to the 401(k). Employer contributions must also be 100% vested immediately. Employers have two choices on how to make contributions: 

3% Non-elective: Contribute 3% of every eligible employee's pay to the 401(k) (i.e., a non-elective contribution);

4% Match: The traditional Safe Harbor match is a 100% match on the first 3% and a 50% match on the next 2% employee save (i.e., 4% in total).

Enhanced Safe Harbor: 

Enhanced Safe Harbor contributions must also vest immediately, however, employers can structure their contribution to be more generous than the traditional Safe Harbor plan. For example, employers may match 100% of the first 6% or contribute 10% of pay for every eligible employee. While enhanced Safe Harbor is more flexible, there are a number of additional requirements to keep in mind (outlined in 2023 Definitive Guide to Safe Harbor 401(k) Plans).

Qualified Automatic Contribution Arrangement (QACA): 

QACA plans are a great choice for employers that want a Safe Harbor but also want to vest contributions. QACAs require employers to automatically enroll employees into the plan, but add the ability to implement a 2-year cliff vesting schedule. Another benefit of QACAs is that the employer match is lower (3.5% vs. 4%). The typical QACA match is 100% on the first 1% and 50% on the next 5% (3.5% total). Alternatively, an employer could choose a non-elective contribution of at least 3%. 

Why should a small business offer a Safe Harbor plan?

While Safe Harbor plans are not perfect for every small business, Safe Harbor 401(k) plans offer several benefits for small business owners, including:

Impact of adding profit sharing to a Safe Harbor Plan

  1. Tax savings: Employer contributions are tax-deductible, which can help reduce your business's tax liability. 
  2. Personal Tax Shelter: In 2023, business owners may be able to combine Safe Harbor plans with profit-sharing plans to shelter up to $66,000 per year (under age 50) or $73,500 per year (if they are 50+).  
  3. Attracting and retaining employees: A strong retirement plan offering can help small businesses attract and retain top talent in a competitive job market.
  4. Simplified administration: By offering a Safe Harbor plan, businesses can avoid the hassle of nondiscrimination testing and potential corrective measures.

Types of employers that benefit from Safe Harbor 401(k) plans:

While many businesses can benefit from Safe Harbor plans, they are particularly advantageous for those with a high percentage of highly compensated employees, family-owned businesses, or companies with low participation and low savings rates. Examples include professional service firms (such as law, accounting, or consulting firms), technology startups, and family-owned businesses. 

For a more detailed look at the types of employers that can benefit the most from Safe Harbor 401(k) plans, download our white paper: 2023 Definitive Guide to Safe Harbor 401(k) Plans.

Safe Harbor notice requirements

Employers must provide each eligible employee an annual notice within a reasonable period before the beginning of the plan year (generally 30-90 days) or the date that employees are eligible. Both traditional Safe Harbor and QACA Safe Harbor notices must provide detailed information on the plan including: 

  • The matching or non-elective contribution formula
  • The definition of eligible compensation
  • Instructions on how to make savings elections
  • Details on withdrawal and vesting provisions

Deadline to start a Safe Harbor 401(k) in 2023

Plans must send out Safe Harbor notices by Septemeber 1, 2023 to start a new Safe Harbor for 2023.  New Safe Harbor plans must allow employees to save into the 401(k) for at least three months in the plan’s first year.  This means that the plan must be effective as of October 1, 2023.  Since employees need to have 30 days notice - the plan must send notices no later than September 1st.      

Deadline to convert an existing 401(k) to a Safe Harbor

To add a Safe Harbor plan for the 2024 plan year, you will need to give employees notice no later than December 1, 2023.  Consequently, we recommend consulting with your provider in October or November.  

Safe Harbor 401(k) vs. Traditional: Pros and cons

Given the requirements for a Safe Harbor plan, many small businesses may be wondering if adding a Safe Harbor is worth it.  

There is no single right answer, it really depends on your situation, but at a high level:

Safe Harbor 401(k) Plans Traditional 401(k) Plans
Pros - Easier to administer
- Avoids nondiscrimination tests (NDTs)
- Popular with employees (match + immediate vesting)
- Flexible
- Lower cost (if no match)
Cons - Higher cost (mandatory employer contributions)
- Less flexible financially
- Must pass nondiscrimination tests
- If you fail NDTs you may need to:
    -Return some HCE contributions; and/or
    -Make employer contributions

SECURE Act 2.0 makes it easier to start a Safe Harbor 401(k)

The 2022 SECURE Act 2.0 has made Safe Harbor plans even more attractive for small businesses by introducing new provisions, such as expanded tax credits and increased flexibility in plan design. The tax credits fall into two groups: Startup costs and contributions:

Startup cost tax credit: 

The secure act may cover up to 100% of employer costs for a new 401(k) for the first three years ($250k per NHCE) for employers with fewer than 50 employees. Employers with more than 50 employees also receive the $250 per NHCE, however, their credit is limited to 50% of qualified employer costs. You can estimate your potential Secure Act tax credits here

Employer contribution tax credit:

Employers may also be eligible for an additional $1,000 tax credit per employee for contributions to the employee's account. However, this tax credit only applies to contributions to employees that make less than $100,000 in 2023 (indexed for inflation). Additionally, this tax credit decreases each year as follows: 

  • Year 1: 100%
  • Year 2: 100%
  • Year 3: 75%
  • Year 4: 50%
  • Year 5: 25%
  • Year 6+: 0%

To stay updated on these changes and learn how they may impact your decision to implement a Safe Harbor plan, download our 2023 Definitive Guide to Safe Harbor 401(k) Plans.

I can’t afford a match! Can I start a small business 401(k) without making it Safe Harbor?

Yes! Small businesses can start a 401(k) and pass annual nondiscrimination tests if all employees join and save at high rates. This may be easier than you think - learn more about how we help our clients get 90%+ participation rates.  

5 Strategies to get high participation rates

The key to helping all employees join and save at high rates is making it easy to join, providing personalized education, and effective, ongoing monitoring.    

  1. Make joining so easy, it's automatic:  Automatically enrollment can help boost plan participation rates among NHCEs. In fact, a 2021 study found that 9/10 stay in the plan, and 84% of employees said: “auto-enrollment is key to saving earlier”.  
  2. Proactive, personalized communications: Provide engaging communications (email, online tools, and even text messages) to make sure employees know about and are excited by the plan. Make sure your provider personalizes the communications.
  3. Holistic financial help: Many employees may not feel confident saving if they are struggling to make ends meet. Choosing a provider that can provide holistic help with budgeting, debt, college funds, etc., can make a big difference. 
  4. Limit HCE contributions: If necessary, restrict the contributions of HCEs to maintain a more balanced contribution ratio between HCEs and NHCEs. This can be an effective, albeit less popular, method.
  5. Monitor throughout the year: Regularly review plan participation and contribution data to identify potential issues with the ADP and ACP tests. By identifying concerns early, you can make adjustments before the end of the plan year to improve the likelihood of passing the tests.

How to construct a competitive 401(k) in 2023

According to Vanguard’s 2022 study, 95% of 401(k) plans provided an employer contribution. A recent survey by SHRM, found similar numbers with 82% of plans offering some sort of company match, of which 28% provided immediate eligibility.

Which Safe Harbor design is most popular?

According to Vanguard, Safe Harbor plans were quite popular with employers making contributions - 70% chose a Safe Harbor plan.  

Given the tight labor market, it’s no surprise that employer contributions were so popular among employers.  

In fact, 62% of workers viewed a 401(k) match as “key to reaching retirement goals,” according to a 2022 Study by Principal.

Frequently asked questions

Q: How much does a Safe Harbor 401(k) cost?

The overall cost of the mandatory Safe Harbor contribution will be based on the number of eligible employees and their average salary.  ​​However, you can do a lot to contain the cost of employer contributions by choosing the right Safe Harbor plan design.  For example, assume two employers, each with 20 employees making an average of $80k/year.  However, one employer expects low participation (60%) while the other expects high participation (80%).  

The sponsor with low participation may be better off with a 4% Safe Harbor Match: with only 60% expected to get the full match, their total cost (as a percentage of payroll) will be 2.4%.   

The second employer, however, would likely be better off with a 3% non-elective contribution, because the match would likely be 3.2% of payroll assuming 80% got the full match.  

Moreover, companies with high employee turnover, may be able to significantly reduce the cost of a Safe Harbor by choosing long eligibility periods - up to one year.  

Can I change the Safe Harbor plan provisions mid-year?

A: If you need to make changes to your Safe Harbor 401(k) plan, you generally must do so before the beginning of the plan year in which the changes will take effect. 

That said, there are a few exceptions to this rule and you may be able to make changes if: 

You are only adding certain features like Roth contributions, hardship withdrawals, in-service withdrawals

You do not increase vesting (for QACA plans only)

You do not increase eligibility requirements 

You do not change the type of Safe Harbor (i.e., change from traditional Safe Harbor match to QACA)

You add (or modify) a contribution formula provided that: 

  • The change is adopted 3 months before the end of the year
  • The change is retroactive for the entire year
  • A notice is provided at least 3 months prior to the year end

Q: Can I suspend Safe Harbor contributions?

A: It is possible to decrease or halt safe harbor contributions within a 401(k) plan during a given year, however, you must meet the requirements in the table below:

Table: Requirements for eliminating Safe Harbor contributions mid-year

Requirements to Cancel Mid-Year Explanation
Required conditions The plan can remove a Safe Harbor only if either:
1) The business experiences financial losses; or
2) has included a statement in the plan year notice indicating that contributions might be decreased or halted.
The plan also must have met Safe Harbor requirements in the prior year.
Additional Notice A notification is issued to employees with the date of the reduction or halt, as well as guidance on altering their deferrals.
Employee Choices Employees are granted sufficient time to modify their deferral decisions prior to the reduction or halt taking place.
ADP Evaluation The plan is revised to implement the ADP test for the entire plan year, utilizing the current year testing approach.
Timing of Reduction/Halt The reduction or halt becomes effective no sooner than 30 days following the distribution of the additional notice or the date the amendment is signed.

Let’s walk through an example:

Acme started a Safe Harbor plan with a 4% non-elective 401(k) and diligently provided the required notices to employees in 2022 for the next year. Importantly, the notice indicated the possibility of reducing or suspending contributions. In May 2023, the company decides to suspend contributions. They issue an additional notice on May 15, 2023, outlining the suspension's commencement on June 15, 2023, and explain how employees can modify their deferrals. The company then signs the plan amendment before June 15th. If all these actions are taken:

The company still needs to pay the 4% non-elective safe harbor contribution for the period before the Safe Harbor was removed (i.e., January 1, 2023, to June 15, 2023).

Since the company removed its Safe Harbor status, they will have to perform the annual nondiscrimination tests at the end of 2023: 

  • The ADP test (using data from the entire year January 1, 2023, to December 31, 2023).

Q: Can I switch from a traditional 401(k) plan to a Safe Harbor 401(k) plan?

A: Yes, you can switch from a traditional 401(k) plan to a Safe Harbor plan by amending your plan document and meeting the required deadlines and notice requirements.

Q: Can I make additional employer contributions to a Safe Harbor 401(k) plan?

A: Yes, you can make additional profit-sharing contributions or discretionary matching contributions in addition to the required Safe Harbor contributions. These additional contributions may be subject to vesting schedules and compliance testing.

Q: Can I terminate a Safe Harbor 401(k) plan?

A: Yes, you can terminate a Safe Harbor plan by following the IRS guidelines for plan termination. Be aware that you must still satisfy the required contributions for the year in which the plan is terminated.

Q: When can I fund Safe Harbor contributions?

A: The employer contributions to Safe Harbor plans may be funded on an ongoing basis (i.e., each paycheck) or funded after the plan year. If funding on a year-end basis, the contributions must generally be funded by the date that the employer files their taxes.  


A Safe Harbor 401(k) plan can provide significant benefits to both employers and employees, making it an attractive option for businesses looking to optimize their retirement plan offerings. By understanding the features, requirements, and advantages of Safe Harbor plans, you can make an informed decision and unlock the full potential of a 401(k) plan for your business.

Read the full white paper: 2023 Definitive Guide to Safe Harbor 401(k) Plans. It covers everything you need to know about Safe Harbor 401(k) plans, including how tax credits can make it completely free, including employer contributions for up to three years.

Download the 2023 Safe Harbor Guide
Download the 2023 Safe Harbor Guide

Understand new rules for 2023, benefits of Safe Harbor and strategies to minimize Safe Harbor costs.

Download Guide
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David Ramirez - CEO at ForUsAll
David Ramirez, CFA

About the author

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.