Employer contributions are a way for employers to add funds to their employees’ 401(k) accounts. These contributions can be a valuable tool for rewarding employees and maximizing retirement savings. Depending on the provisions elected, employer contributions may be required (Safe Harbor) or optional (discretionary).

Who This Applies To

This information is for plan sponsors/employers who are considering making contributions to their 401(k) plan or need guidance on annual contribution limits.

Types of Employer Contributions

As a plan sponsor, you can choose from several types of employer contributions depending on the provisions in your plan document. 

  1. Safe Harbor Contributions
    • Required if your plan has adopted Safe Harbor provisions.
    • Automatically allow your plan to pass IRS nondiscrimination testing.
  2. Employer Discretionary Matching Contributions
    • Based on how much employees contribute from their own paychecks. 
    • Subject to annual nondiscrimination testing.
    • Flexible option - employer decides on the match formula annually and is not required to make a contribution every year
    • Encourages employees to participate and save more since they receive “free money” when they contribute.
  3. Employer Discretionary Profit-Sharing Contributions
    • Employer-funded contributions allocated among eligible employees (not required to be based on profits).
    • Can be based on a fixed percentage of compensation or allocated proportionally from a contribution “pool.”
    • Flexible option - amount/percent funded is determined annually by the employer, no required contribution.

📌 Note: All employer contributions (Safe Harbor, discretionary match and profit-sharing) count toward the overall IRS annual contribution limit when combined with employee deferrals.

How Safe Harbor Works

Safe Harbor contributions are designed to simplify plan administration by automatically satisfying IRS nondiscrimination testing requirements. If you adopt a Safe Harbor plan, you commit to making certain minimum contributions for employees each year.

Safe Harbor Contribution Types

You can structure Safe Harbor contributions in one of three ways:

  1. Basic Match: 100% of the first 3% of compensation deferred by the employee, plus 50% of the next 2%.
  2. Enhanced Match: Any formula that is at least as generous as the basic match (e.g., 100% of the first 4% deferred).
  3. Non-Elective Contribution: 3% of compensation for all eligible employees, regardless of whether they defer.

Notice Requirement

  • Plan sponsors must provide employees with a Safe Harbor notice each year, at least 30 days before the beginning of the plan year. Ubiquity generates this notice for full-service safe harbor plans.
  • The notice explains the contribution type, eligibility, and employee rights.
  • Some Safe Harbor designs (such as QACA, described below) have slightly different notice timing rules.

Vesting Requirement

  • Traditional Safe Harbor contributions must be 100% immediately vested, meaning employees own them as soon as they are deposited.
  • QACA Safe Harbor contributions (Qualified Automatic Contribution Arrangement) may apply a two-year vesting schedule for employer contributions.

QACA Safe Harbor (Qualified Automatic Contribution Arrangement)

  • A QACA combines Safe Harbor status with automatic enrollment.
  • Employees are automatically enrolled at a minimum of 3% of pay, with automatic increases each year not to exceed 15%. (Cap depends on plan provisions and effective date).
  • Employer contributions can follow the same basic/enhanced match or 3% non-elective structure. (Safe Harbor match can be structured to provide a lower match).
  • Unlike standard Safe Harbor, QACA allows employer contributions to vest over up to two years, giving sponsors more flexibility while still meeting IRS Safe Harbor requirements.

📌 Tip: Choosing Safe Harbor can reduce administrative burden since it eliminates annual ADP/ACP nondiscrimination testing, but it also locks you into a guaranteed annual employer contribution.

How Discretionary Match Works

Discretionary match contributions allow you to decide each year whether to match employee deferrals, and if so, how much. Unlike Safe Harbor matches, these are not required and give you maximum flexibility.

Key points:

  • When to decide: You can wait until the end of the year (or later in the plan year) to determine the matching formula.
  • Common formulas:
    • Match a percentage of employee deferrals up to a certain limit (e.g., 25% of deferrals up to 4% of pay).
    • Use a flat match for all employees who contribute.
  • Testing requirement: Because discretionary matches are not Safe Harbor, they must pass annual nondiscrimination testing (ADP/ACP tests) to ensure highly compensated employees are not favored.
  • Flexibility: You may increase, decrease, or skip the match altogether each year, depending on your business’s financial situation.

Example:

If you choose to match 25% of employee deferrals up to 4% of pay:

  • Maria earns $60,000 and defers 6% ($3,600).
  • Only the first 4% of her pay ($2,400) counts toward the match.
  • Employer match = 25% × $2,400 = $600.

This type of contribution can be a valuable tool if you want to reward employee participation but keep the freedom to adjust based on company performance.

How Profit-Sharing Works

Profit-sharing is one of the most flexible employer contribution options. Your plan document outlines who qualifies, but some plans include a “last-day rule,” meaning employees must still be employed on December 31 to receive a profit-sharing allocation.

You can fund profit-sharing in one of two ways:

  • Allocate a fixed dollar pool across employees (proportional to compensation).
  • Allocate a fixed percentage of compensation to each eligible employee. 
  • New Comparability Formula: Contributions are allocated at different rates for different employee groups (such as Highly Compensated Employees (HCEs) and Non-Highly Compensated Employees (NHCEs)). While this method may result in HCEs receiving a higher percentage allocation, the plan must still pass IRS nondiscrimination testing to ensure the benefit is fair overall. 

Contribution Deadlines

The deadline for funding employer contributions depends on the type of contribution and how it is defined in your plan document.

  • Safe Harbor Match:
    • If calculated based on per pay period compensation → deposit as soon as administratively feasible after each payroll, but no later than quarterly.
    • If calculated based on annual compensation → deposit by the employer’s tax filing deadline (including extensions) for that plan year. You can fund more frequently (ex. per pay period) but must be trued up based on annual compensation.
  • Safe Harbor Non-Elective (3%):
    • Calculated based on annual compensation → deposit by the employer’s tax filing deadline (including extensions) for the plan year. You can fund more frequently (ex. per pay period) but must be trued up based on annual compensation.

📌 Note: Safe Harbor contributions based on annual compensation may be postponed until December 31 of the following plan year, but they are tax deductible only in the year actually deposited, not the year they apply to.

  • Discretionary Match:
    • Deposit timing depends on employer preference as long as it is applied consistently.
    • If annual, must be deposited by the employer’s tax filing deadline (including extensions).
  • Profit-Sharing:
    • Always an annual determination, unless last day rule does not apply. Regardless, the contribution must always be based on annual compensation and would require a true-up if funded throughout the year. 
    • Must be deposited by the employer’s tax filing deadline (including extensions) for that plan year.

Check our Compliance Calendar for deadlines by business type (C Corp, S Corp, LLC, etc.).

Ubiquity Contribution Calculation Support

Ubiquity can prepare contribution calculations (Safe Harbor, match, or profit-sharing) up to three times per plan year at no additional cost. This ensures accuracy and helps you fund contributions on time. To request a calculation, email support@myubiquity.com.

Annual IRS Contribution Limits and Deduction Rules

Each year, the IRS sets limits on how much can be contributed to 401(k) plans. These include both employee and employer contributions. 

  • Employee Contribution Limit (2025):
    • $23,500 for employees under age 50 
    • $31,000 for employees age 50-59 and 64+ (includes a $7,500 “catch-up” contribution) 
    • $34,750 for employees age 60-63 (includes a $11,250 "super catch-up" contribution)
  • Employer + Employee Combined Contribution Limit (2025):
    • $70,000 per employee, or 100% of compensation (whichever is less)
    • $77,500 for employees age 50-59 and 64+ (includes catch-up), or 100% of compensation (whichever is less)
    • $81,250 for employees age 60-63 (includes "super catch-up"), or 100% of compensation (whichever is less)

This combined cap includes:

  • Employee deferrals (Pre-tax and Roth)
  • Safe Harbor contributions
  • Employer matching
  • Profit-sharing contributions

404(c) vs. 415 Limits

The IRS applies more than one set of limits to retirement plan contributions:

  • 415 Limit: Caps the total annual contributions (employee + employer) to each participant.
  • 404(c) Limit: Caps the employer’s total deductible contributions to the plan, generally 25% of total eligible payroll for all participants.

Because these rules measure contributions differently, a plan may meet the 415 limit for individual participants but still exceed the 404(c) deductible limit at the employer level (or vice versa).

Why Request a Calculation from Ubiquity?

To help you avoid excess contributions and costly corrections, Ubiquity can prepare contribution calculations (Safe Harbor, match, or profit-sharing) and perform the necessary limit testing to confirm compliance with IRS rules. We provide up to three calculations per plan year at no additional cost. To request one, email support@myubiquity.com.

What Happens if Limits Are Exceeded?

  • If an employee contributes to more than one retirement plan during the year (e.g., another 401(k) or 403(b)), it is their responsibility to ensure they don’t exceed the IRS limit. (See: How Do I Correct an Over-Contribution to My 401(k))
  • Excess employee contributions must be refunded to the employee, and distribution fees apply for corrections.
  • Excess employer contributions must be refunded to the employer and they must adjust their tax return accordingly.

Best Practices for Plan Sponsors

  • Track contributions regularly and request a contribution calculation to prevent overfunding and ensure necessary testing is completed.
  • Communicate with employees about total contribution limits if they participate in multiple retirement plans.
  • Coordinate with your payroll provider to ensure deferrals are capped at the IRS limit.

Need Help?

If you need assistance with employer contributions, please contact us.