What Is a Safe Harbor 401(k) Plan and How Does It Work?

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A Safe Harbor 401(k) is a retirement plan with one subtle difference from a standard 401(k): Businesses can bypass the IRS's annual nondiscrimination testing — a requirement for plans like 401(k)s to maintain their tax-qualified status.

These plans allow business owners and highly compensated employees (HCEs) to maximize their retirement contributions (up to the full annual limit, e.g., $23,500 in 2025 and $24,500 in 2026, plus catch-ups) without restrictions or refunds due to failing IRS nondiscrimination tests.

Safe Harbor plans require immediate employee vesting and mandatory employer contributions, and they are especially valuable to small business owners with fewer than 100 employees.

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These plans make it easier for small-business owners to meet the rules set by the government while offering an attractive employee benefit.

However, Safe Harbor 401(k) plans come with a catch. While matching contributions is a great perk 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:

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 (and often costly) annual nondiscrimination tests to determine whether it 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, 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.

Pros

These plans help attract and retain talented employees. According to a 2024 Guideline study, half of employees surveyed said they would turn down a job offer from an employer that didn't offer retirement benefits.
Safe Harbor plans allow small businesses to circumvent the complex annually mandated nondiscrimination tests.
Like a traditional 401(k), they offer tax benefits, which reduce an employee's taxable income.
They can be combined with profit-sharing to increase employee contribution limits.

Cons

While Safe Harbor 401(k)s are simpler to manage, they can still mean hefty costs for your small business. They could also bump up your payroll expenses.
They come with immediate employee vesting, meaning employees, even those who have quit or are leaving shortly, are entitled to contributions.
They can be expensive, because employer contributions are fixed.

Types of Safe Harbor 401(k)s

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: With these plans, the employer provides a match that is at least as generous as the basic match at every deferral level (and the match cannot be based on deferrals exceeding 6% of compensation).

2026 changes affecting all 401(k) plans

Enacted by Congress in 2022, “Secure 2.0" paved the way for sweeping changes to retirement in the U.S., including updates to 401(k) plans.

Employees can defer $23,500 in 401(k) plans in 2025. In 2026, that number increases to $24,500.
Workers 50 and older can make up to $7,500 in catch-up contributions in 2025. In 2026, those same workers can make up to $8,000 in catch-up contributions.
There is also a "super" catch-up contribution limit of $11,250 for employees between the ages of 60 and 63. However, not all plans offer the super catch-up option.
Auto-enrollment for certain 401(k) plans was a change made in 2025. Most 401(k) and 403(b) plans (established after Dec. 28, 2022) must include automatic enrollment in the plan with a minimum 3% employee deferral rate.
Secure 2.0 increased access to 401(k) and 403(b) plans for certain part-time workers. In 2024, employers had to allow plan access for employees who clocked at least 500 hours annually for three consecutive years. In 2025 and beyond, the threshold drops to two consecutive years.

One change for high-earners in 2026 — Employees with prior-year FICA wages above $150,000 must make all catch-up contributions on a Roth (after-tax) basis. If your employer's Safe Harbor plan offers catch-ups but no Roth option, your employer will need to add Roth capability by 2026 or restrict catch-ups for high earners.

Can a safe harbor 401(k) plan be a Roth 401(k)?

Yes, a safe harbor 401(k) plan can be a Roth 401(k) or a traditional 401(k), depending on the employer's preference.

Will my employer contribute to my safe harbor 401(k)?

Can you say "free money?" Safe harbor 401(k) plans are generally simpler versions of traditional 401(k) retirement plans. Employers must contribute to their employees' accounts through matching or non-elective contributions, essentially a gift for employees.

Fully vested contributions. These plans have the same withdrawal rules, contribution limits and compounding power as traditional 401(k) plans, but the vesting rules differ. Contributions are fully vested at the time they are made, eliminating the need to follow a vesting schedule. That's good news for employees and employers alike.

Immediate tax breaks. Also, employees can defer a portion of their salary into a safe harbor 401(k) for an immediate tax break, and the invested funds grow tax-deferred. That means employees don't pay tax on their contributions until they withdraw the funds in retirement.

Employers that offer these plans must give eligible employees plan information within a reasonable time frame.

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.