Safe Harbor 401(k) Cost for a 14-Person San Diego Business, After Credits

On a $1,550,000 eligible payroll, a 3% safe harbor nonelective contribution runs $46,500 a year. The SECURE 2.0 employer contribution credit pulls about $10,000 off that in year one, so the real first-year cost is closer to $36,500. By year six the credit is gone and the full $46,500 stays on the business.

The census this runs on

Hypothetical business, built for this article. Not a client, not a projection, and not a quote anyone will honor.

Fourteen people at a San Diego professional services firm. One owner at $360,000, which is also the 2026 annual compensation limit under section 401(a)(17) per IRS Notice 2025-67, so nothing above that counts. One senior employee at $185,000, over the $160,000 highly compensated employee threshold under section 414(q) for 2026 in the same notice. Twelve people below that line: two at $120,000, three at $95,000, three at $80,000, two at $65,000, and two at $55,000. Everyone eligible. Total countable payroll, $1,550,000.

A companion post covers how to pull that census and why it, not revenue, decides which plan design fits. This one assumes the design is already picked and only asks what it costs. If the prior question is still open for you, whether to stay with CalSavers or move to a private plan, start there instead.

Two formulas, and why I only priced one

A safe harbor 401(k) requires an employer contribution that is fully vested when made. Two ways to satisfy it, per IRS and DOL Publication 4222, 401(k) Plans for Small Businesses.

First, the basic match. Dollar for dollar on the first 3% of compensation an employee defers, then fifty cents on the dollar on the next 2%. Second, the nonelective. A flat 3% of compensation to every eligible employee whether or not they defer anything.

The match usually costs less, but the amount depends entirely on how many people actually defer and how much, and nobody knows that number before the plan exists. The nonelective does not move. I used that as a constant for this example so the arithmetic can be checked.

Year one, before and after

Here is the whole calculation. Owner, $360,000 times 3% is $10,800. Senior employee, $185,000 times 3% is $5,550. The twelve remaining employees earn $1,005,000 between them, and 3% of that is $30,150. Add the three and the employer contribution is $46,500. For the contribution credit, the Instructions for Form 8881 (Rev. December 2025) exclude anyone who received wages over $105,000 for the tax year, which knocks out the owner, the senior employee, and both people at $120,000. That leaves ten employees. Every one of them is getting more than $1,000 (3% of $55,000 is $1,650, the smallest of the ten), so each hits the $1,000 per employee ceiling. Ten times $1,000 is $10,000.

Hypothetical 14-person San Diego professional services firm, plan year 1. Illustrative only, not a projection and not a client. Employer contribution formula per IRS and DOL Publication 4222. Credit mechanics and the $105,000 wage exclusion per IRS, Instructions for Form 8881 (Rev. December 2025). Compensation and HCE limits per IRS Notice 2025-67 for 2026.

Two things about that table. First, $10,800 of the $46,500 is the owner contributing to the owner’s own account, so whether that reads as a cost depends on where you are sitting. The staff-only figure is $35,700. Second, the startup credit sits on its own line on purpose, and the next section explains why.

What this deliberately leaves out

Plan administration. Recordkeeping, the third-party administrator, the audit threshold, the advisor. Those are real annual dollars and this post does not put a number on them, because the only honest source for that number is the written quote from the provider who is bidding your plan. Ask for it broken out by line, per participant and per plan, and ask which lines are paid by the business versus deducted from participant accounts.

That is what the startup credit offsets. For an employer with 1 to 50 employees the credit is 100% of qualified startup costs, per the Instructions for Form 8881 (Rev. December 2025), limited to the greater of $500 or the lesser of $250 for each eligible non-highly compensated employee or $5,000. Twelve of those employees here, so the ceiling is $3,000 a year.

Keep in mind the ceiling is not the credit. If qualified startup costs come in under $3,000, the credit comes in under $3,000 with them.

Year six

The startup credit runs for the first credit year and the two after it. The IRS puts it flatly in the Instructions for Form 8881 (Rev. December 2025): “No credit is allowed for any other tax year.” The contribution credit runs five years, at 100% of the eligible amount in years one and two, then 75%, 50%, and 25%, subject throughout to the $1,000 per employee ceiling.

Which produces a result most calculators skip. Because 75% of every one of those ten contributions is still more than $1,000, the ceiling holds and year three is still worth $10,000. The step-down does not actually bite until year four.

Same hypothetical firm, payroll held constant across all six years so the credit is the only thing moving. Illustrative only, not a projection. Applicable percentages and the $1,000 per employee limit per IRS, Instructions for Form 8881 (Rev. December 2025).

Year four in the open, since it is the first year the arithmetic changes. Half of $2,850 is $1,425, over the ceiling, so the three employees at $95,000 stay at $1,000 each. Same for the three at $80,000, where half of $2,400 is $1,200. But half of $1,950 is $975 and half of $1,650 is $825, so the four lowest-paid employees fall under the ceiling and the total lands at $9,600. Year five, 25% of every contribution is below $1,000, so the ceiling stops doing any work at all and the credit is $5,737.50.

Payroll will not actually hold still for six years. It goes up, and 3% of a bigger number is a bigger number. The step from $36,500 to $46,500 is the floor of what happens here, not the ceiling.

Three things the credits do not do

One. They offset tax. A credit is claimed on a return against a liability, so a year with little or no liability is a year the credit does less than the table implies. General business credit carryforward and ordering rules apply and they are not simple. That is a question for your CPA against your actual return, not something to assume from a blog post.

Two. The Instructions for Form 8881 (Rev. December 2025) also reduce the deduction. Your otherwise allowable deduction for startup costs, and for employer contributions, gets reduced by the credit amount. You do not get both at full value on the same dollar.

Three. The contribution credit has its own gate. The applicable percentage is reduced by 2% for each employee over 50 during the preceding tax year, and eligibility requires no more than 100 employees who received at least $5,000 of compensation in the prior year. Fourteen people clears both comfortably, but a business growing through 50 will watch this credit shrink while the contribution obligation grows.

The objection worth naming

The pushback that comes up most when an employer-funded plan is on the table is not the size of the number. It is the commitment. Having to fund it every year, in a year the business would rather not.

Fair, but worth checking against what is already happening. Owners raising that objection are frequently funding profit sharing in the plan they already have, every single year. The dollars have been going out. What changes with safe harbor is that discretionary becomes required, and the switch from choice to obligation is the actual thing being decided, not the amount.

The number this article did not price is the one that argues the other way. The 2026 elective deferral limit is $24,500 per person, per IRS Notice 2025-67, and a safe harbor design is what lets an owner use it without a nondiscrimination test clawing it back. If the owner’s own target is far above what a 401(k) can hold, that is a cash balance conversation and a different set of arithmetic. Retirement plan design is one of six areas inside the San Diego Business Owner Blueprint, and it is rarely the one that should be decided first.

Before you sign anything

• Confirm with your CPA whether the business has enough liability in the relevant years to use these credits, and how the deduction reduction on Form 8881 lands on your return.
• Confirm with your CPA or attorney whether any controlled group, common control, or affiliated service group rules pull another entity in, since Form 8881 treats those members as one employer.
• Evaluate with your third-party administrator whether the basic match or the nonelective produces a lower expected contribution against your specific census.
• Ask the provider quoting the plan for administration cost in writing, itemized, and for which lines are billed to the business versus the participants.
• Confirm the prior-plan rule with your CPA. Form 8881 disqualifies an employer that maintained a qualified plan for substantially the same employees in the three preceding tax years.
• Run the year six number, not the year one number, against the years the business has historically had the least room.

Questions that come up

Does the safe harbor contribution have to go to the owner too?

Under the 3% nonelective, every eligible employee receives it, and the owner is an eligible employee. In the example above that is $10,800 of the $46,500 going into the owner's own account. The staff-only portion is $35,700.

Why is the contribution credit only $10,000 on a $46,500 contribution?

Two limits. The credit is capped at $1,000 per employee, and the Instructions for Form 8881 (Rev. December 2025) exclude contributions made for any employee who received wages over $105,000 for the tax year. In the example that removes four of the fourteen people, leaving ten employees at $1,000 each.

Do the credits mean the plan costs nothing for three years?

No. The credits offset tax, not the contribution itself, and they depend on the business having a liability to offset in that year. The employer contribution is still funded in cash out of the business, and in the example the net cost is $36,500 in year one rather than zero.

What happens to the cost when the credits run out?

In this example the net employer contribution steps from $36,500 in years one through three to $46,500 in year six, holding payroll constant. The startup credit is available for the first credit year and the two following, and the contribution credit for five years. Real payroll growth pushes the year six figure higher than $46,500.

Does this include plan administration cost?

No, and that is deliberate. This post does not estimate recordkeeping, third-party administration, or advisory cost, because the only reliable figure is the written itemized quote from the provider bidding your plan. The startup cost credit is what offsets those costs, at 100% for an employer with 1 to 50 employees, limited here to $3,000 a year.

Sources

Credit mechanics, percentages, ceilings and exclusions throughout are from the IRS Instructions for Form 8881 (Rev. December 2025). Safe harbor contribution formulas are from IRS and DOL Publication 4222, 401(k) Plans for Small Businesses. The 2026 deferral, compensation and highly compensated employee limits are from IRS Notice 2025-67.

If you want the same arithmetic run on your census

Swap your payroll file in and the six-year line changes shape, sometimes a lot, because the $105,000 exclusion and the $1,000 ceiling both key off individual pay rather than totals. That is a complimentary review, and the scope and any fee are discussed before anything starts.

Which number matters more to you right now, year one or year six? Pick a time here, or start with the San Diego Business Owner Blueprint if the retirement plan is only one of the open questions.