What Is a Safe Harbor 401(k)?

Part of the Small Business Job Protection Act, a Safe Harbor 401(k) makes it easier for small businesses to offer retirement plans to their employees.

the word 401(k) written on a whiteboard
(Image credit: Getty Images)

Safe Harbor 401(k)s are retirement plans with one key distinction from standard 401(k)s — businesses can avoid the IRS's annual nondiscrimination testing. Safe Harbor plans require immediate vesting for employees and mandatory employer contributions and are especially valuable to small business owners with fewer than 100 employees. 

These plans make it easier for small-business owners to meet the rules set by the government while offering an attractive employee perk. However, Safe Harbor 401(k) plans come with a catch. While matching your employees’ contributions is great for your employees' financial well-being, and may help your company recruit and retain good employees, it could also increase your overall employee budget. 

Why nondiscrimination testing can be tricky for small businesses

Per federal law, all businesses must pass annual nondiscrimination tests, which help ensure 401(k) plans benefit all employees — not just high earners or business owners. These tests include:

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  • Actual Deferral Percentage (ADP) test. This test compares the average salary deferrals of highly compensated employees (HCEs) to those of non-highly compensated employees (NHCEs).
  • Actual Contribution Percentage (ACP) test. This test compares the average employer-matching contributions received by both HCEs and NHCEs.
  • Top-heavy test. This test helps evaluate whether a plan is top-heavy. In other words, the value of the assets in key employees’ retirement accounts cannot exceed 60% of all assets in an employer’s 401(k) plan.

To prove to the IRS that a 401(k) plan meets these requirements, it must undergo a series of complex annual nondiscrimination tests to determine whether or not the plan is fairly balanced.

A small business may face penalties if it fails one or more of these tests. The company may also have to refund 401(k) contributions made by its HCEs, and they in turn, would have to pay taxes on the money they got back. Awkward.  

Large companies can typically pass these tests because they have a team or department that can keep pace with all of the requirements. They also likely have many employees at different income levels contributing to their 401(k)

Pros and cons of Safe Harbor 401(k) plans

As with all retirement plans, Safe Harbor 401(k) plans have benefits and drawbacks. 


  • The plans help attract and retain talented employees
  • These 401(k) plans allow small businesses to circumvent the complex annually mandated nondiscrimination tests.
  • Like a traditional 401(k), they provide tax benefits, meaning they decrease an employee's taxable income
  • They can be combined with profit-sharing to increase employee contribution limits


  • Although easier to administer, these plans can require careful analysis of possible high outlays for a small business. Safe Harbor 401(k)s could increase your payroll costs
  • They come with immediate employee vesting, meaning employees, even those who have resigned or are leaving shortly, are entitled to these contributions
  • They can be expensive because employer contributions are fixed

Types of Safe Harbor 401(k)s

Essentially, there are three options for a Safe Harbor 401(k)

  • Nonelective contributions: These plans allow employers to make a 3% contribution for all employees, even if an employee chooses not to participate. That means that even if an employee makes no contributions to their 401(k) plan, their employer must still contribute to the employee's plan.
  • Basic matching: Also known as an “elective” Safe Harbor plan, the employer matches 100% of the first 3% of an employee’s contributions. After that, 50% of an employee’s additional contributions (up to 5%) are matched by the employer. 
  • Enhanced matching: These plans may offer a 100% match on up to 4% of an employee's contributions. 

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Kathryn Pomroy

For the past 18+ years, Kathryn has highlighted the humanity in personal finance by shaping stories that identify the opportunities and obstacles in managing a person's finances. All the same, she’ll jump on other equally important topics if needed. Kathryn graduated with a degree in Journalism and lives in Duluth, Minnesota. She joined Kiplinger in 2023 as a contributor.