Traditional Safe Harbor 401k Vs. Newer QACA Safe Harbor 401k: Which is Best for Your Company?

The benefit of all Safe Harbor 401(k)s is that in exchange for making nominal employer matching contributions to participants' payroll 401k contributions, the employer can ignore the results of failed 401k compliance tests.

There are two types of Safe Harbor 401(k)s: The Traditional Safe Harbor 401k and the newer QACA Safe Harbor 401k (aka Qualified Automatic Contribution Arrangement 401k). The below chart compares the two.

The main difference between the two is that the Traditional 401k Safe Harbor requires the employer to contribute a little more money each year to the company's 401k than the QACA Safe Harbor. Alternatively, the QACA Safe Harbor 401k requires the employer automatically enroll all employees in the company's 401k and make matching contributions, but at a lower rate. Generally, the Traditional Safe Harbor 401k requires the employer to make a bigger match to a smaller group, and the QACA Safe Harbor requires the employer to make smaller matching to a larger group.

Below is a comparison of the Traditional Safe-Harbor 401(k) to the QACA Safe-Harbor 401(k):

Requirement Traditional Safe Harbor 401(k) QACA Safe Harbor 401(k)
Eligibility

Plan eligibility requirements cannot exceed statutory limits:

  • Salary deferrals and safe harbor contributions - age 21 and 1 year of service
  • Additional employer contributions - age 21 and 2 years of service

To be credited with a year of service, an employee can't be obligated to work more than 1,000 hours of service.

Once an employee meets the age and service requirements, they can participate on the next plan entry date. Common entry date frequencies are monthly, quarterly, and semi-annually.

To automatically pass the top-heavy test, eligibility requirements for the safe harbor contribution must match the salary deferral requirements.

Same.
Automatic enrollment Not required.

Required. The default deferral rate must start at no less than 3% and increase at least 1% annually to no less than 6% (10% maximum).

Annual escalator can be avoided by choosing a flat 6-10% default rate.

Contributions

Employers must make one of the following safe harbor contributions to participants:

  • Basic match - 100% of salary deferrals up to 3% of compensation, plus 50% on the next 2% (4% of compensation total).
  • Enhanced match - Must be at least as much as the basic match at each tier of the match formula. 100% match on the first 4% of compensation is common.

Employers must make one of the following safe harbor contributions to participants:

  • Basic match - 100% of salary deferrals up to 1% of compensation, plus 50% on the next 5% of compensation (3.5% of compensation total).
  • Enhanced match - Must be at least as much as the basic match at each tier of the match formula.
General compliance

Nonelective contribution - 3% (or more) of compensation, regardless of salary deferrals.

HCEs can be excluded from safe harbor contributions. Allocation conditions can't apply.

Additional matching and profit sharing contributions permitted. The additional match can be exempt from the ACP test when certain conditions are met.

Same.
Default investment No special requirements. Must meet Qualified Default Investment Alternative (QDIA) requirements.
Vesting

Safe harbor contributions are subject to 100% immediate vesting.

A 3-year cliff or 6-year graded vesting schedule can be applied to additional employer contributions.

Safe harbor contributions may be subject to a 2-year cliff schedule.

A 3-year cliff or 6-year graded vesting schedule can be applied to additional employer contributions.

ADP/ACP testing

Not required unless one of the following conditions applies:

  • Salary deferrals are subject to shorter eligibility requirements than safe harbor contributions.
  • A match that's not exempt from the ACP test is made by the employer.
  • Voluntary (after-tax) contributions are made by participants.
Same.
Top heavy testing

Not required unless one of the following conditions apply:

  • Salary deferrals are subject to shorter eligibility requirements than safe harbor contributions.
  • A profit-sharing contribution (including a forfeiture reallocation) is made by the employer.
  • A match that's not exempt from the ACP test is made by the employer.
  • Voluntary (after-tax) contributions are made by participants.
Same.
Participant disclosure Must distribute a safe harbor notice to participants prior to initial plan eligibility and then 30-90 days before the start of each new plan year. Safe harbor notice must include certain automatic enrollment and QDIA information.