401(k) Plans for Small Businesses
Small business owners looking to adopt 401(k) plans are sometimes discouraged by the typically high costs and complicated testing requirements associated with plan administration (see sidebar). Fortunately, over the past few decades, legislators have introduced a number of simplified alternatives to the traditional 401(k) to help encourage more business owners to adopt these potentially valuable retirement benefit programs. Among them are the safe harbor plan, the qualified automatic contribution arrangement (QACA), and most recently, the starter 401(k) plan.
Safe Harbor Plan
In a traditional 401(k) plan, you're not required to make employer contributions. Safe harbor plans allow you to avoid testing by making fully vested contributions on behalf of employees.
You have several options. First, you can make a nonelective contribution of 3% (or more) of pay for each eligible employee, even those who aren't actively contributing. Alternatively, you can match employee contributions dollar for dollar up to 3% of pay and match contributions from 3% to 5% of pay at a 50% rate (the "basic match"). You also have the option of making an "enhanced" matching contribution that is at least as generous as the basic match.
Election change
With a safe harbor plan, you can decide as late as 30 days prior to the end of a plan year whether you'll use the 3% nonelective safe harbor for that year, which could be useful if you want to see how your testing is progressing before you commit to a safe harbor contribution for the year. Alternatively, your plan may be amended as late as the end of the year following the plan year, but only if the nonelective safe harbor contribution is 4%.
Employee contributions
As with traditional 401(k) plans, employees in safe harbor 401(k) plans can contribute up to $24,500 in 2026, plus an additional $8,000 for those age 50 to 59 and 64 and older ($11,250 for those who reach age 60 to 63 in 2026).
QACAs
A QACA is a safe harbor 401(k) plan with an automatic enrollment feature. While most of the rules applicable to safe harbor plans also apply to QACAs, there are some notable exceptions.
Under a QACA, an employee who fails to make an affirmative deferral election is automatically enrolled in the plan. An employee's automatic contribution must be at least 3% for the first two calendar years of participation and then increase 1% each year until it reaches 6%. You can require an automatic contribution of as much as 15%.
Employees can change their contribution rate or stop contributing at any time and get a refund of their automatic contributions if they opt out within 90 days.
Your required employer contribution is either 3% of pay to each eligible employee or a dollar-for-dollar matching contribution up to 1% of pay and 50% on additional contributions of up to 6% of pay. You may also impose a two-year vesting schedule (compared to immediate vesting in a safe harbor plan). And if you select certain default investments for employee contributions, you'll generally be relieved of fiduciary responsibility for any losses your employees incur from those investments.
Starter 401(k) Plans
Employers with no other retirement plan (with limited exceptions) can adopt what's known as a starter 401(k) plan. Designed to be low cost and easy to administer, starter 401(k) plans allow only employee contributions. Employees must be auto-enrolled at a minimum contribution rate of 3% (not to exceed 15%) and may contribute up to $6,000 in 2026 ($7,100 for employees age 50 or older).
| Safe Harbor 401(k) | QACA | Starter 401(k) | |
|---|---|---|---|
| Which employers can adopt? | All nongovernmental employers | All nongovernmental employers | All nongovernmental employers that do not currently sponsor a plan |
| Employee elective contribution limit (2026) | Lesser of $24,500 or 100% of compensation; additional $8,000 catch-up if age 50 to 59 or 64 and older; $11,250 for those age 60 to 63 | Lesser of $24,500 or 100% of compensation; additional $8,000 catch-up if age 50 to 59 or 64 and older; $11,250 for those age 60 to 63 | Lesser of $6,000 or 100% of compensation; additional $1,100 catch-up if age 50 or older |
| Required employer contribution (compensation limited to $360,000 in 2026) |
·Dollar-for-dollar match up to 3% of compensation, 50% match above 3% to 5% (enhanced match also available) OR At least 3% of compensation to each eligible employee ·100% vested |
·Dollar-for-dollar match up to 1% of compensation, 50% match above 1% to 6% (enhanced match also available) OR At least 3% of compensation to each eligible employee ·100% vested after 2 years |
Employer contributions not permitted |
| Discrimination testing | Exempt from ADP test; exempt from ACP test if you make the safe harbor required contribution, don't match contributions over 6% of pay, and limit discretionary match to 4% of pay | Exempt from ADP test; exempt from ACP test if you make the safe harbor required contribution, don't match contributions over 6% of pay, and limit discretionary match to 4% of pay | Exempt |
| Top-heavy testing | Exempt if employer contribution limited to safe harbor required contribution; otherwise required | Exempt if employer contribution limited to safe harbor required contribution; otherwise required | Exempt |
| Additional employer contributions permitted? | Yes (discrimination testing may be required); generally 3-year cliff or 6-year graded vesting | Yes (discrimination testing may be required); generally 3-year cliff or 6-year graded vesting | Employer contributions not permitted |
