401(k) Safe Harbor Plan


401(k) plans require special nondiscrimination testing (ADP & ACP) which limit the deferrals of highly compensated employees to the average deferrals of the non-highly compensated employees. Quite often the passing of these tests will limit the deferrals of highly compensated employees; or will require additional contributions from the employer.


A 401(k) plan that includes safe harbor provisions will not need to perform ADP & ACP testing if the employer makes certain safe harbor contributions. Avoiding the ADP test will allow owners and highly compensated employees to make the maximum annual deferral regardless of the deferrals made by the non-highly compensated employees.


The Small Business Job Protection Act of 1996 added "Safe Harbor" provisions for 401(k) plans. These provisions provide the ability to pass ADP and ACP testing by making a 100% vested, matching contribution to all non-highly compensated employees. The match must be 100% of the employees' deferral of up to 3% pay and a 50% match of the next 2% deferral.



   Employee Deferrals

  Employer Match











The employer must provide a safe harbor notice to all employees on a timely basis. The safe harbor may be changed from plan year to plan year with appropriate notice to employees.


An alternative employer safe harbor contribution is available. The safe harbor may be satisfied with a 100% vested 3% of pay contribution for all eligible employees. This contribution meets ADP and ACP testing requirements and also top-heavy contribution requirements.


If the plan provides exclusively for safe harbor contributions, it may be exempt from top heavy testing. If the plan is subject to top heavy rules, the safe harbor contributions count toward satisfying the 3% top heavy minimum contribution requirements.



Disadvantages of the safe harbor plan are that no allocation requirements may be imposed, such as 1000 hours of service or employment on the last day of the plan year, and employer contributions must be fully vested and may not be withdrawn due to hardship.