What Safe Harbor 401k Brings to You and Your Business

Having a 401k plan available is one of the greatest incentives for your employees. These plans allow them to have some peace of mind that they will be comfortable in their retirement, no matter how many years away that may be.

However, there are some serious considerations that need to be made before starting a 401k plan. One such issue is making sure that your plan is fair for all of your employees and that it doesn’t prioritize higher wage earners within your company.

In fact, the IRS actually tests all 401k plans each year to ensure that they are fair for all members of a business.

The easiest way to ensure IRS compliance and breeze past these annual tests is to implement a safe harbor 401k.

How Do the IRS Tests Work?

Each year, there are three tests run by the IRS on all 401k plans to ensure that every eligible member within a company’s plan is being considered fairly. These tests are as follows:

  • The Actual Deferral Percentage Test (ADP): As the name suggests, the ADP test looks at the percentage of earnings that higher wage earners within a company defer into their account as compared to the same percentage for lower wage earners. 
  • The Actual Contribution Percentage Test (ACP): This test looks at contributions and employer matching to determine whether higher wage earners are saving considerably more and receiving more favorable treatment with regards to the plan than eligible lower wage earners.
  • Top-Heavy Test: If the owner of the company and the main, more well-compensated workers maintain greater than 59% of the plan’s balance, the 401k plan is considered top heavy.

By failing the ADP, ACP, or Top-Heavy Test, companies are subject to heaps of paperwork and hefty monetary fines. Therefore, it’s best to avoid even the possibility of failing one or more of these tests by implementing a Safe Harbor Provision.

How Does a Safe Harbor Provision Protect Companies?

Safe harbor plans ensure fairness by compelling companies to match all employee contribution, or make non-elective contributions. There are different types of matching contributions such as basic, enhanced matching, or others, but the idea behind a safe harbor plan is that all employees receive essentially the same, fair treatment with regards to their retirement plan.

How Do I Start a Safe Harbor 401k Plan for My Business?

The process of starting a new safe harbor 401k plan is fairly intuitive. All that is required is that you contact a plan provider before the deadline (October 1st 2022) and initiate the process.

For those that already have a 401k plan in place but would like to add a safe harbor provision, the process is similar, but these changes must be made before the deadline of November 30th 2022.


Hopefully this article shed some light on the importance of having a safe harbor provision in place for your 401k plan. If you have further questions, a plan provider would be happy to speak with you today!

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