Recent regulations have simplified nondiscrimination testing while improving contribution levels for your highly compensated employees (HCE). The general rules of using a safe harbor plan are:

  • Maximum 401(k) contributions are allowed for HCE without regard to deferrals by non-HCE. The safe harbor plan eliminates ADP and ACP testing when the plan satisfies the applicable safe harbor requirements.
  • Satisfaction of the ADP and ACP test requires an approved safe harbor employer non-elective contribution (profit sharing) or matching contribution.
  • Timely notification of a safe harbor plan to eligible employees is mandatory for each year the employer will apply the safe harbor rules. The notice must be provided at least 30 days before the beginning of the plan year.
  • The plan document must specify the provisions the employer elects as safe harbor options to satisfy the ADP and ACP test.
  • Safe harbor contributions must be 100% vested and are subject to the same distribution rules as 401(k) contributions.
  • The safe harbor contributions may be contributed to non-HCE only or may include HCE. If including HCE, the benefit becomes greater to HCE.
  • The basic matching formula is 100% of the employee’s elective deferrals up to 3% of compensation and 50% of the next 2% of compensation, up to a maximum of 5% of compensation. For example, if a participant has elective deferrals of 5%, the matching contribution will be 4% of the employee’s compensation. 
  • The employer has the option of using an Enhanced Matching Formula that is stated in the plan document. The most common is 100% of the employee’s elective deferrals not exceeding 6% of compensation. We will discuss the enhanced formula in detail with any employer wanting to contribute more than the basic match level.
  • The employer also has the option of contributing a non-elective contribution equal to 3 percent of compensation to eligible employees instead of a safe harbor matching formula.
  • The safe harbor contribution may allow a free pass on ADP testing, ACP testing and top heavy requirements if no additional contributions are made to the plan. Additional contributions are allowed but may require testing or certain allocation requirements.
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