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Choosing A Safe Harbor 401(k) For Your Small Business

A fan favorite amongst small business owners, Safe Harbor plans are similar to traditional 401(k) plans, with the exception of the added benefit of passing non-discriminatory testing (NDT). This isn’t the only difference between the two, however. 

What is a Safe Harbor Plan?

A Safe Harbor 401(k) is a type of employer-sponsored plan designed to automatically pass, or be overall exempt from, non-discriminatory testing from the IRS. 

The plan is structured in a way that requires companies to contribute to their employees’ plans, ensuring that none of the employees are left out, or “discriminated against”, when it comes to contributing to their 401(k) accounts. Safe Harbors are also structured to ensure that highly-compensated employees (HCEs) aren’t contributing more than everyone else.

Nondiscriminatory Testing

The Actual Deferral Percentage (ADP) test, Actual Contribution Percentage (ACP) test, and Top-Heavy test are the nondiscrimination tests that Safe Harbor plans automatically pass or are exempt from. 

The ADP and ACP tests are used to compare how much HCEs are contributing their 401(k) accounts compared to the rest of the company, ensuring that HCEs aren’t unfairly benefiting from their plan. 

The ADP test is used to compare the salary deferral percentages of HCEs to non-highly compensated employees. In other words, it sees what percentage of their salary HCEs are contributing. Similar to the ADP test, the ACP test evaluates the amount of matching contributions employers are making for HCEs compared to non-highly compensated employees.

Lastly, the Top-Heavy test measures the assets in the accounts of key employees to make sure they do not disproportionately outweigh the assets in the accounts of non-key employees.


While employer contributions are not required for traditional 401(k) plans, they’re obviously required for Safe Harbor plans. Although required, there are three different options employers have when it comes to matching contributions:

  1. Basic: Employer matches 100% of the first 3% of compensation, plus 50% on the next 2% of compensation. 
  2. Enhanced: Employer matches 100% of contributions on the first 4% of compensation.
  3. Non-Elective: Employer matches 3% of employee compensation.

If contributing to your employees’ 401(k) doesn’t pose a problem for your business, then opening a Safe Harbor may be a good option for you, especially if nondiscriminatory testing is something you worry about. Contact us today to open a Safe Harbor 401(k) plan before the November 15th deadline.

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