Safe Harbor 401(k): The 2025 guide for business owners

Wondering if a Safe Harbor 401(k) plan is the right move for your business? We're here to help you make the decision with confidence. This guide cuts through the complexity and explains everything from how to get set up with a Safe Harbor 401(k) plan, to what that means for 401(k) compliance testing, and more. Let’s start with some background information.

What is a Safe Harbor 401(k) plan?

A Safe Harbor 401(k) plan is defined as a retirement savings plan that automatically satisfies most nondiscrimination testing if employers elect to make required contributions to their employees’ 401(k) accounts. These required contributions encourage broader employee participation, so the IRS offers the plan sponsor (the employer) “safe harbor” from certain nondiscrimination testing processes.

What are nondiscrimination tests, and how do they affect your 401(k) plan?

There are three main types of nondiscrimination tests required by the IRS to help ensure that 401(k) plans benefit both the business owners and the employees. Two of these tests compare the average contribution rates of highly compensated employees (HCEs) to the average contribution rates of non-highly compensated employees (NHCEs) to your company’s 401(k). The third test looks at how much of all plan assets are owned by key employees. Let’s take a look at each one:

1. Actual Deferral Percentage

The Actual Deferral Percentage (ADP) test measures the average percentage of income the HCEs contribute to their 401(k), compared to the average percentage of income the non-HCEs contribute to the 401(k) plan.

2. Actual Contribution Percentage

The Actual Contribution Percentage (ACP) test is similar, but it compares the employer matching contributions made to HCEs with the matching contributions made to non-HCEs.

Tip: What’s the difference between the ACP and ADP tests? These two tests look at different types of contributions being made to the 401(k) plan. The ADP test looks at contributions employees choose to contribute from their paychecks, while the ACP test focuses on the employer matching and employee after-tax/nondeductible contributions being made to the 401(k) plan.

3. Top-Heavy test

The third test, the Top-Heavy test, looks at individuals the IRS defines as “key employees” and measures the value of the assets in their 401(k) accounts, compared to all assets held in the 401(k) plan.

What happens if you fail a nondiscrimination test?

If your plan fails any of these tests, you’ll have to deal with expensive corrections and time-consuming administrative hassle to correct the failures. But here's the good news: A Safe Harbor 401(k) plan is designed to help you avoid this uncertainty, burden, and the potential fallout from annual nondiscrimination testing.

The IRS designed these corrections to bring the plan’s proportions back into a fair balance for all employees. They allow companies to correct nondiscrimination test failures in a few ways, but these are the most common:

A Safe Harbor 401(k) plan can help employers avoid these worries and let you focus on growing your business.

What are the benefits of a Safe Harbor 401(k) plan for business owners and employees?

Safe Harbor 401(k) plans help employers automatically satisfy the trickiest parts of IRS nondiscrimination testing by committing to contribute to employee 401(k) plans. Other benefits of Safe Harbor 401(k) plans include:

Setting up a Safe Harbor 401(k) plan

Do these benefits resonate with your business goals? If so, learn how you can set up your Safe Harbor 401(k) plan.

Types of Safe Harbor plans and rules and requirements

While Safe Harbor plans automatically satisfy most noncompliance testing, these plans have their own rules you may need to follow. The common requirement, no matter which type of Safe Harbor plan offered, is that employers must make contributions to eligible employees’ 401(k) accounts. However, the other rules and requirements vary based on the type of Safe Harbor 401(k) plan you choose:

Learn more about the differences between the two types of Safe Harbor plans.

Feeling a bit overwhelmed by the details? The truth is, with the right partner, a Safe Harbor 401(k) plan can be just as simple to manage as a traditional 401(k), if not simpler. Guideline can simplify plan administration for you by handling most participant notice requirements, participant disclosures, contributions, and timing requirements. In fact, plan administration on a Guideline Safe Harbor 401(k) could save you time each month by minimizing your administrative burden.³

"I don’t even think about taking care of compliance — to the point where if there was ever a compliance issue, I’d be shocked."

Jonna M.

Owner, Affogato HR Consulting
Client of Guideline. Views may not be representative of other clients

Contribution requirements for a Safe Harbor 401(k)

So, you know Safe Harbor plans require employers to contribute to employee retirement accounts. But let's look into how these contributions actually function. Here’s what to know:

Contributions can take three different forms, the first two of which are matching. This means employees must make traditional or Roth 401(k) elective deferrals to their accounts in order to receive the matching contributions. The third option requires your company to make a contribution equal to 3% or more of an eligible participant’s annual compensation, even if employees don’t defer any of their income into their 401(k) account.

How to calculate Safe Harbor 401(k) matching costs

Here are examples of the different Safe Harbor matching contribution formulas:

Basic matching

Safe harbor 401(k) basic match example with a $60,000 salary

This example is illustrative and not meant to be investment or tax advice.

Enhanced Matching and non-elective contribution

Safe Harbor 401(k) enhanced match and nonelective contribution example with a $60,000 salary

This example is illustrative and not meant to be investment or tax advice.

Safe Harbor contribution limits

In 2025, the basic employee deferral limits for a Safe Harbor 401(k) plan are the same as any employer-sponsored 401(k): $23,500 per year for participants under age 50. For employees aged 50 or older, the total amount they can contribute is generally $31,000 (including a $7,500 catch-up contribution).⁴ Thanks to SECURE 2.0, participants turning age 60-63 during the plan year could be eligible for an even larger catch-up contribution, potentially reaching $34,750. That's a significant bump to their retirement savings.

Tip: From the perspective of an HCE, a Safe Harbor 401(k) plan means they’ll be much more likely to actually be able to contribute up to these limits.

Safe Harbor deadlines

October 1 is the final deadline for starting a new Safe Harbor 401(k) plan for 2025. However, if you are planning to start one, set a reminder to talk to your 401(k) plan provider in early August. This is because you’ll need at least a month and a half to prepare. Setting up your plan can take up to a week or more, and eligible employees must be able to contribute elective deferrals no later than the first payroll in October as a Safe Harbor 401(k) plan must be in effect for three full months.

For existing plans, the deadlines will depend on the type of Safe Harbor contribution you’ll be making.

Important dates for new Safe Harbor 401(k) plans

These are the dates to know for setting up a new plan for the current year:

Important dates for existing plans - Safe Harbor match

If you want to add a Safe Harbor matching provision to an existing 401(k) plan, your administrator can adopt a plan amendment that goes into effect January 1 of a future plan year. Here are the deadlines:

Important dates for existing plans - Safe Harbor nonelective contributions

If you want to add a nonelective provision to an existing 401(k) to take advantage of Safe Harbor status for the current year, you can do this any time before December 1st, so long as you are willing to pay the minimum 3% contribution for the entire current plan year. After December 1st, you can still add a Safe Harbor nonelective contribution for the year in question, up to the deadline of December 31st of the following year. However, the required contribution increases to 4%, due to legislation in the SECURE Act.

These are the dates to know for adding a Safe Harbor nonelective contribution to your plan:

Employee notice requirements

If your plan includes matching or automatic enrollment features, you may need to notify each eligible employee in writing annually about their rights and obligations under the plan. Some 401(k) providers, like Guideline, will send all employee notices for you. You’re required to give notice within a reasonable amount of time — at least 30, but not more than 90 days — before the beginning of the plan year. This can give employees time to consider their deferral options. If you’re making a Safe Harbor nonelective contribution, you generally don’t need to provide a 30-day notice to employees.

Making mid-year changes to a Safe Harbor plan

If you already offer a Safe Harbor 401(k) plan but would like to make changes during the year, there are special rules that you may need to follow. All the details for mid-year changes are included in IRS Notice 2016-16, but these are the basic things the IRS requires:

Once you’ve satisfied the notice rules above, you may be able to make changes to certain aspects of the plan including, for example, increasing future Safe Harbor nonelective contributions from 3% to 4%, or changing the plan entry date for eligible employees from quarterly to monthly. Several types of changes aren’t allowed during the year, however, so you may want to review the rules carefully before you amend your plan.

Is a Safe Harbor 401(k) plan right for my company?

Generally, a Safe Harbor plan is a strategic choice for businesses that do any of the following:

In terms of pros and cons, you may want to make a cost-benefit calculation to decide if the benefits outweigh the costs.

Pros to offering a Safe Harbor 401(k) plan: can lead to automatic compliance, tax savings, maximized contributions for HCEs, and top talent retention.

One con to offering a Safe Harbor plan: Full employee participation might lead to a modest increase in your payroll—around 3% or more. But if you factor in the valuable tax credits, such as the employer contribution tax credit, you can significantly offset these expenses.²

Estimate your 401(k) plan costs with our calculator

Get started with a Safe Harbor plan with Guideline

Guideline makes it easy for you to set up and manage a Safe Harbor 401(k) plan. Our all-in-one 401(k) plans⁵ come with low monthly fees and no transaction fees. All the key features you need are included at no additional cost.⁶ See how other companies like yours are benefiting from Safe Harbor 401(k) plans.