While they have an unusual name and very specific requirements, Safe Harbor 401(k) plans are incredibly popular with small business owners.
We cover a lot of the details—from contribution formulas to key deadlines—in our 2025 Safe Harbor Guide. But in a nutshell, Safe Harbor plans generally require less administrative work, they can strengthen an already popular benefit, and they can provide employers with peace of mind since there is less to worry about when it comes to most IRS nondiscrimination tests. They may even allow owners and other highly compensated individuals to keep more of their personal contributions in the plan even if others have chosen to not defer.
While they make up a majority of our plans, a lot of small business owners choose to open a traditional plan over Safe Harbor. The two most common reasons we hear are that small business owners don't think compliance testing is a big risk for their business and that they don't think they can afford the contribution.
While every business has different expenses and needs, we've used hypothetical numbers to estimate annual employer costs for a range of business sizes to help visualize the cost implications of starting a Safe Harbor plan with the basic match formula at Gusto Retirement on the Core pricing tier.
Business size | Total payroll2 | Estimated annual employer plan cost | Estimated annual employer contribution cost1,3 | Estimated total annual cost |
Owner + 2 employees | $175,000 | $1,716 | Up to $7,000 | Up to $8,716 |
Owner + 5 employees | $325,000 | $2,004 | Up to $13,000 | Up to $15,004 |
Owner +10 employees | $575,000 | $2,484 | Up to $23,000 | Up to $25,484 |
This illustration assumes an owner making $75,000 a year; employees making $50,000 a year, a 4% match, and Core pricing of $119 monthly fee and an $8 per active participant monthly fee. This illustration is for informational purposes only, does not serve as a binding offer, and is subject to change.⁵
It's pretty clear that depending on your pricing tier, employer contributions can generally make up the majority of a plan's total annual cost. It's worth keeping in mind that employer contributions that meet certain requirements are tax deductible—up to 25% of total eligible payroll.⁴ In addition, if you qualify you may get a tax credit (instead of a deduction) for the first five years you offer a plan.
So while making an employer contribution that meets Safe Harbor requirements is undoubtedly more expensive than not making a contribution at all, some of that added cost can help out your business in the form of tax deductions or credits.
Safe Harbor 401(k) plans
A big reason smaller small businesses elect to open a Safe Harbor plan is because fewer employees means one change in personnel or an individuals' contributions can have a bigger impact.
As an example, if you have 3 employees and one leaves the company, the ratio of employer contributions to your employees' contributions could change drastically, which could potentially result in a failed test. Even if you do not have turnover, one employee who decides to stop making deferrals can lead to failed testing. For bigger businesses, these changes in personnel or individual contributions will usually have a smaller impact on the plan's nondiscrimination testing results.
In addition to automatically satisfying most IRS nondiscrimination tests, Safe Harbor plans give employees guaranteed employer contributions — a meaningful perk on top of their own savings. They also allow owners and other highly compensated employees to contribute up to the full annual 401(k) deferral limit without restrictions. And thanks to SECURE 2.0, the cost of getting started is lower than ever: businesses with 50 or fewer employees can now claim a startup tax credit covering 100% of administrative costs — up to $5,000 per year for the first three years — plus an additional credit of up to $1,000 per employee for employer matching contributions.⁴ For small businesses looking to compete with larger employers on benefits, Safe Harbor plans punch well above their weight.
FAQs
What is a Safe Harbor 401(k) plan?
A Safe Harbor 401(k) plan automatically satisfies most IRS nondiscrimination tests in exchange for the employer making required contributions to employees' accounts and providing certain notices. These plans require less administrative work and provide employers peace of mind regarding compliance.
Are Safe Harbor employer contributions tax deductible?
Yes, employer contributions that meet Safe Harbor requirements are typically tax deductible—up to 25% of total eligible payroll.⁴ This helps offset the added cost of required contributions.⁴
