Subsurface dams are a promising engineering solution for the development of groundwater resources around the world, particularly in mitigating seawater intrusion in coastal zones. However, their potential impacts on the groundwater environment have raised significant concerns. In this study, we employed a three-dimensional (3D), variable-density, unsaturated-saturated groundwater flow model to investigate the effects of a groundwater-storage-type subsurface dam, constructed within the freshwater zone of an unconfined coastal aquifer, on groundwater levels and salinity in the downstream area. The model results revealed that following the construction of the subsurface dam, groundwater levels downstream exhibited more pronounced fluctuations, characterized by phase advances, increased amplitudes, and higher frequencies, particularly after heavy rainfall events. Numerical simulations under various subsurface dam configurations further demonstrated that these fluctuations were amplified with a higher dam crest elevation or when the dam was positioned closer to the coast. Additionally, during the recharging period of the subsurface reservoir (i.e., the period from dam construction to groundwater level rise to the dam crest level), seawater in the downstream area intruded landward from its original position, posing at least a temporary threat to coastal water quality. A higher dam crest elevation extended the duration of seawater intrusion, while a dam located closer to the coast resulted in a greater horizontal extent of seawater intrusion. These findings can be useful for enhancing assessment methodologies and engineering designs of subsurface dams to mitigate these adverse impacts on the water environment.