What are the Available Safe Harbor Plan Formulas?

Posted By Maria T. Hurd, CPA

Contrary to popular belief, company owners and highly compensated employees (HCEs) are not guaranteed the opportunity to contribute the maximum 401(k) contribution limit to their company’s retirement plan, even if the 401(k) deferral contributions represent their own money. That is because 401(k) plans are subject to nondiscrimination tests to ensure that a disproportionate share of the elective deferrals are not those of the HCEs.

In general, the Actual Deferral Percentage (ADP) Test and the Aggregate Contribution Percentage (ACP) Tests limit the amount that HCEs can contribute and have their contributions matched based on the average contributions of and the matching contributions to the Non-highly compensated employees (NHCEs) as follows:

If the Average Deferral/Match Percentage of NHCEs is:
Then the maximum average ADP/ACP of HCEs is:
Less than 2% 2 times the average for the NHCEs
Between 2% and 8% Average NHCEs plus 2%
More than 8% 1.25 times the average NHCEs ADP


The discrimination tests can be avoided if the employer sponsors a safe harbor plan. Safe harbor plans allow employers to disregard the nondiscrimination test, if they make a generous, pre-approved employer contribution amount to all eligible employees. The minimum safe harbor employer contribution formulas available are as follows:

1. Traditional Safe Harbor Plan Match

1. A 100% vested dollar-for-dollar match up to 3% of compensation, plus 50 cents for every dollar for the next 2% of compensation, or better, which is often effectively dollar-for-dollar up to 4% of compensation.

2. Automatic Enrollment Safe Harbor Plan Match

1. An automatic enrollment safe harbor plan is called a Qualified Automatic Contribution Arrangement (QACA). The safe harbor match contribution for a QACA is 100% of elective contributions up to 1% of compensation and 50% of elective contributions between 1% and 6% of compensation, or better. This contribution can be subject to a 2-year cliff vesting schedule. This is effectively a 3.5% Matching contribution.

3. Nonelective 3% contribution

1. A 3% nonelective contribution to all eligible participants is available for both a traditional safe harbor plan and a QACA.

4. Nonelective 4% contribution

1. A 4% nonelective contribution opportunity is available for plan sponsors who wait too long to declare a 3% contribution. Any time after the 30th day before the end of a plan year through the last day of the subsequent year, an employer can retroactively elect to contribute a 4% nonelective safe harbor contribution.

The following chart may make it easier to remember the available formulas:

Type of Safe Harbor Plan Deferral Match Compensation Limit

Traditional Safe Harbor Plan

100% Vesting


+ $1



Up to 3% eligible compensation

For the next 2% of eligible compensation or better. (Often $1 for $1 up to 3.5%)

Automatic Enrollment Safe Harbor Plan-QACA $1 $1 Up to 1% of eligible compensation
2-year-cliff-vesting +$1 .50c Between 1% and 6% of eligible comp. or better. (Often $1 for $1 up to 3.5%)
Traditional Safe Harbor and QACA 3% Nonelective Contribution to all Eligible Participants
Traditional Safe Harbor and QACA 4% Nonelective Contribution to all Eligible Participants if declared between 12/3/CY and 12/31/Next Year


When the Internal Revenue Code is involved, nothing is ever reduced to a simple chart without additional caveats and conditions, such as the following additional requirements:

  • For administrative simplicity, employers can provide a QACA match of $1 for $1 up to 3.5% of eligible compensation.
  • Also for administrative simplicity, employers can choose an automatic enrollment deferral of 6%, the maximum deferral amount that can be matched
  • There cannot be allocation conditions, such as a last day of employment requirement, to receive a safe harbor contribution
  • The definition of eligible compensation must be nondiscriminatory
  • Safe harbor contributions cannot be withdrawn before age 59½, except for hardship reasons, if the plan permits
  • Qualified Automatic Contribution Rates (QACA) must be a uniform percentage of eligible compensation, cannot exceed 15% of compensation, and must satisfy the following minimum percentages:
    • 3%: First eligibility period ending on the last day of the year following the eligibility year
    • 4%: Second year
    • 5%: Third year
    • 6%: Fourth year
  • The plan must generally be in place before the beginning of the year so that timely written notice of safe harbor match contribution may be distributed to all eligible employees between 30 and 90 days before the beginning of the plan year.
  • Enhanced match formulas are available if they meet the following requirements:
    • The enhanced match must be at least as generous as the basic match;
    • Deferrals in excess of 6% of compensation may not be matched
    • The rate of match may not increase as deferrals increase; and
    • The rate of the match may not be greater for HCEs than for NHCEs.
    • For an example computation of an enhanced match, please refer to our previous blog How to Order a Triple Stack Match for your Plan
  • Additional contributions to the safe harbor may trigger discrimination testing.
  • For additional discussion of discrimination testing and available corrections, please refer to Leveling Out ADP and ACP Tests with Refunds, QNECs/QMAcs, Bottom-Up QNECs, or One-to-One Contributions and Explaining Discrimination Test Refunds to HCEs.

The SECURE Act eliminated the notice requirements for safe harbor plans with nonelective contributions, but not for match plans. Additionally, it added the opportunity for employers to amend the plan to provide a 3% nonelective safe harbor contribution at any time before the 30th day before the plan’s year end or 4% up to December 31 of the following year for a calendar year plan. As a practical matter, a plan that failed the discrimination tests would have had to distribute the contributions that caused the failure of the test to the HCEs by March 15th, so amending the plan to provide a 4% nonelective contribution after March 15th may not make sense as a practical matter. However, the opportunity to elect a 3% or 4% nonelective contribution after the plan year has already begun, or even retroactively for the previous plan year will allow employers who can afford a safe harbor nonelective contribution to safeguard their Highly Compensated Employees’ ability to contribute the maximum 401(k) deferral limit of $19,500 for the years 2020 and 2021, while allocating a generous employer contribution to the NHCEs.

In a year in which providing novel distribution opportunities as discussed in our blogs Unsaving for Retirement in Pandemic Times and Unsaving for Retirement in Pandemic Times – Part II has become necessary, this opportunity to close the retirement income gap with additional contributions is a win-win for the employers and the participants who take advantage of the SECURE Act’s safe harbor rules.


Photo by: Karthikeyan K (License)