At Guideline, we offer traditional safe harbor 401(k) plans as well as qualified automatic contribution arrangement (QACA) safe harbor plans. This guide will cover the similarities and differences between these two plan types.
What is a safe harbor 401(k) plan?
A safe harbor 401(k) allows small business owners to offer their employees retirement accounts while worrying less about IRS nondiscrimination testing. Safe harbor plans automatically satisfy most IRS nondiscrimination tests, including the actual deferral percentage (ADP) and, in some cases, the actual contribution percentage (ACP) and top-Heavy tests if certain other conditions are met.
To receive this added benefit, safe harbor plans must meet certain requirements, such as making employer contributions to employees’ accounts. A safe harbor match incentivizes all employees to contribute and take advantage of the plan.
What are the types of safe harbor plans?
There are generally two types of safe harbor plans available: traditional and QACA.
Traditional safe harbor plans
A traditional safe harbor plan requires a specific formula for employer contributions, that the contribution vests immediately, and that specific notices are sent to employees.
While only certain traditional safe harbor plans need to include automatic enrollment, all Guideline plans include an automatic enrollment feature. Find out why we believe in the power of automatic enrollment for employers and employees alike.
Traditional safe harbor plans established on or after December 29, 2022 who don’t meet an exception to the mandatory automatic provisions (MAP) under the SECURE 2.0 Act, must include an eligible automatic contribution arrangement (EACA) with a default rate of at least 3% but not more than 10%. Additionally, they must also include an automatic escalation provision which increases the deferral rate of those currently automatically enrolled each year by 1% until they reach the level stated in the document (at least 10% but no more than 15%).
For traditional safe harbor plans established prior to December 29, 2022 or who meet at least one of the MAP exceptions and that includes an automatic enrollment provision, the default deferral rate can be as low as 1% and automatic escalation is not required.
QACA safe harbor plans
A QACA safe harbor plan differs from a traditional safe harbor plan in that it must include both automatic enrollment and automatic escalation regardless of the date of establishment or if they meet an exception to the MAP requirements under the SECURE 2.0 Act. In addition, they allow for slightly lower employer matching contributions, and permits a short vesting schedule for the employer safe harbor contributions.
Because QACA plans require a lower employer match commitment as a percentage of employees’ deferrals, these plans can be less costly for employers who are still interested in receiving the benefits of safe harbor status. Additionally, QACA plans may help with employee retention, as a vesting schedule can be applied.
For all QACA plans the default deferral rate has to be at least 3% but no more than 10%.
For plans established on or after December 29, 2022 who don’t meet an exception to the mandatory automatic provisions (MAP) under the SECURE 2.0 act, the automatic escalation provision must go to at least 10% but no more than 15%.
For plans established prior to December 29, 2022 or who meet at least one of the MAP exceptions, the automatic escalation provision must go to at least 10% but no more than 15%.
Can a plan change to a traditional safe harbor or QACA plan mid-year?
Current IRS guidelines only permit a plan to switch between a traditional and QACA safe harbor at the beginning of a plan year. In general, traditional and QACA safe harbor plans follow the same rules for mid-year changes.
Traditional safe harbor vs. QACA comparison guide
| Traditional Safe Harbor | QACA Safe Harbor |
Automatic enrollment¹ | Optional; Plans exempt from MAP - no minimum
Plans not exempt from MAP - 3% minimum | Required; 3% minimum deferral rate |
Automatic Escalation | Plans exempt from MAP - optional
Plans not exempt from MAP - required. Rate must increase by at least 1% each year to at least 10%, but not exceed 15%
| Plans exempt from MAP - required. Rate must increase by at least 1% each year to at least 6%, but not exceed 15%
Plans not exempt from MAP - required. Rate must increase by at least 1% each year to at least 10%, but not exceed 15% |
Employer contributions - Matching | Basic match: 100% of the first 3% of employee deferrals, plus 50% from 3-5% of employee deferrals. For a maximum of 4% match.
Enhanced match: At least a minimum of 100% of the first 4% of employee deferrals, but cannot provide matching for deferrals over 6%. | Basic match: 100% up to 1% of employee deferrals, plus 50% from 2-6% of deferrals. For a maximum of 3.5% match.
Enhanced match: At least as much as the QACA basic match at each tier of the match formula, but cannot provide matching for deferrals over 6%. |
Employer contributions - Nonelective | Employers must contribute a minimum of 3% of each eligible employees’ annual compensation, regardless of whether they contribute to the plan.
| Same as traditional safe harbor. |
Vesting requirements on safe harbor contributions | 100% immediate vesting required | Permits up to a two-year cliff or graded schedule |
ADP testing | Automatically satisfied | Same as traditional safe harbor |
ACP/Top-Heavy testing² | Automatically satisfied if certain conditions are met | Same as traditional safe harbor |
IRS safe harbor notice requirement | Notices must be distributed to all plan participants prior to initial plan eligibility (but no more than 90 days before eligibility) and at least 30 days (and not more than 90 days) before the beginning of each plan year.
No notice requirement for nonelective plans. | Same as traditional safe harbor.
Additionally, the safe harbor notice must include certain automatic enrollment, automatic escalation, and investment information. |
Note: Green blocks indicate the same features apply to both plans.
This content is for informational purposes only and is not intended to be construed as tax advice. You should consult a tax professional to determine the best tax advantaged retirement plan for you.
¹ All plans at Guideline must include an automatic enrollment feature.
² Safe harbor 401(k) plans generally automatically satisfy ACP/Top-Heavy requirements, except for plan years in which the employer makes discretionary contributions (such as profit sharing contributions) in addition to safe harbor contributions.