Taxation and Regulatory Compliance

Do Safe Harbor Plans Require Testing?

Understand the unique compliance landscape for safe harbor 401(k) plans, including testing exemptions, ongoing requirements, and how to establish eligibility.

A 401(k) plan is a tax-advantaged retirement savings vehicle offered by many employers, allowing employees to contribute a portion of their pre-tax or Roth income. Traditional 401(k) plans must undergo annual compliance testing to maintain their qualified status and comply with Internal Revenue Service (IRS) regulations. A “safe harbor” 401(k) plan offers an alternative design that simplifies these administrative obligations. This article clarifies the specific testing requirements for safe harbor 401(k) plans, detailing which tests are exempted and which remain necessary.

Exempted Compliance Tests

Safe harbor 401(k) plans bypass certain annual nondiscrimination tests. These exemptions simplify plan administration and provide greater certainty for both employers and employees. The main tests from which safe harbor plans are exempt are the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage (ACP) test.

The ADP test evaluates employee salary deferrals, including both pre-tax and Roth contributions, to ensure highly compensated employees (HCEs) do not contribute disproportionately more than non-highly compensated employees (NHCEs). The ACP test scrutinizes employer matching contributions and employee after-tax contributions, comparing percentages between HCEs and NHCEs. These tests prevent 401(k) plans from unfairly favoring higher-paid employees.

Safe harbor plans are generally deemed to satisfy both the ADP and ACP tests because their required contributions promote non-discrimination. This exemption allows HCEs to maximize contributions up to annual limits without concern for corrective refunds.

A safe harbor plan can also be exempt from the top-heavy test if certain conditions are met. A plan is top-heavy if the total value of accounts for “key employees” (owners and highly paid officers) exceeds 60% of the plan’s total assets. If a plan is top-heavy, it must provide a minimum contribution to non-key employees.

Safe harbor plans that only include safe harbor contributions, elective deferrals, and rollovers are generally exempt from this test. However, if a plan includes additional employer contributions beyond the safe harbor contributions, the top-heavy test may still apply.

Ongoing Compliance Requirements

While safe harbor 401(k) plans offer exemptions from some nondiscrimination tests, they are not entirely free from compliance obligations. Several important tests and administrative requirements remain necessary. Understanding these ongoing duties is essential for employers maintaining a safe harbor plan.

The Actual Contribution Percentage (ACP) test, though exempted for safe harbor matching contributions, may still apply to other types of employer contributions. For instance, if an employer makes discretionary matching contributions or other non-safe harbor contributions, these amounts could trigger ACP testing. This ensures any additional contributions do not disproportionately benefit HCEs.

All 401(k) plans, including safe harbor plans, must adhere to the annual addition limits under Internal Revenue Code Section 415. These limits cap the total amount contributed to a participant’s account from all sources (employee deferrals, employer contributions, and reallocated forfeitures) each year. For 2025, the total combined employee and employer contribution limit for defined contribution plans is $70,000, or $77,500 for those aged 50 or older who also make catch-up contributions. Adherence to these limits is important to maintaining the plan’s tax-qualified status.

The definitions of Highly Compensated Employees (HCEs) and Key Employees remain relevant for various administrative purposes, such as determining eligibility for certain plan features or for the top-heavy test if applicable. Safe harbor plans are also subject to the minimum coverage requirements under Internal Revenue Code Section 410(b). This test ensures the plan benefits a sufficient number of non-highly compensated employees relative to highly compensated employees, preventing plans from covering only a select group of individuals.

Beyond formal testing, safe harbor plans must meet ongoing operational requirements. These include timely deposit of employee contributions, accurate record-keeping of all plan transactions, and proper adherence to distribution rules when participants take money out of their accounts.

Establishing Safe Harbor Status

To gain compliance testing exemptions, an employer must meet specific requirements related to plan contributions, vesting, and participant notice. These actions are foundational to operating a safe harbor 401(k) plan.

A core requirement for safe harbor status is the employer’s commitment to make specific contributions to employee accounts. There are two primary types of safe harbor employer contributions. One option is a nonelective contribution, where the employer contributes at least 3% of each eligible employee’s compensation to their 401(k) account, regardless of employee deferrals. This contribution must be made to all eligible employees.

Alternatively, an employer can satisfy the contribution requirement through a matching contribution. The most common formula, the basic match, involves the employer matching 100% of an employee’s deferrals on the first 3% of compensation, plus 50% on the next 2% deferred. This results in a maximum employer match of 4% of compensation if an employee defers at least 5%. Employers can also provide an enhanced match, which must be at least as generous as the basic match.

All safe harbor contributions, whether nonelective or matching, must be 100% immediately vested. This means employees have full ownership of these employer contributions from the moment they are made, regardless of their length of service. This immediate vesting provision is intended to encourage employee participation and and ensure that employer contributions are a tangible benefit.

Employers must also provide an annual safe harbor notice to eligible employees. This written notice, delivered within a reasonable period before the start of each plan year (typically 30 to 90 days), informs employees about their rights and obligations. The notice must detail the safe harbor contribution formula, any other contributions, and instructions for deferral elections. The plan document must include specific provisions outlining the safe harbor design and its adherence to regulations.

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