Clients Failing Nondiscrimination Testing? A Safe Harbor Plan Can Help (October 1 deadline)

 In Safe Harbor

If you’re like most financial advisors, by third quarter, you’ve likely made a list of clients who may benefit from a retirement plan upgrade. Whether those upgrades be from a SEP IRA, SIMPLE IRA, or a traditional 401(k) plan, deadlines are fast approaching.

One of the most common issues we see in 401(k) plans are failing nondiscrimination tests. A solution for these plans is to adopt a safe harbor provision.

Safe Harbor Plans Explained

A safe harbor 401(k) plan provides all eligible plan participants with an employer contribution (100% vested). In exchange, safe harbor plans allow businesses to avoid failing IRS nondiscrimination testing.

Benefits of a Safe Harbor Plan

There are many benefits of safe harbor plans for the right business. These include:

  • The elimination of correcting nondiscrimination testing and any associated costs for the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests.
  • They permit the maximum allowable elective deferrals for Highly Compensated Employees (HCEs).
  • Safe harbor contributions can be used to satisfy top-heavy requirements, in certain circumstances.

Good Candidates for Safe Harbor Plans

Typically, a safe harbor feature may be a good choice for plans with the following characteristics:

  • They are matching very close to safe harbor levels.
  • The plan is failing ADP, ACP, or top-heavy tests.
  • There is low participation among NHCEs and non-key employees.
  • HCEs are unable to maximize their retirement plan contributions and are issued refunds the following year.

Safe Harbor Contribution and Match Formulas

There are generally three contribution formulas for safe harbor plans:

  1. Basic matching: A 100% match for all employees on 401(k) contributions, up to 3% of compensation, plus a 50% match of the next 2% of their compensation.
  2. Enhanced matching: A 100% match for all employees on 401(k) contributions, up to 4% of their compensation (not to exceed 6% of compensation).
  3. Non-elective contribution: A 3% contribution on compensation, regardless of whether employees make contributions.


The deadline to establish a startup plan with a safe harbor provision is October 1 (Calendar-year basis). Existing 401(k) plans can adopt a safe harbor 3% non-election provision during the year now. If adopted in December, the amount is 4% for the plan year.

Reach out to CRS for more details.

Alex Powell has been in the retirement plan industry since 2014 and is our Regional Director of Sales in Southern Ohio, Indiana, and Kentucky.  Alex can be reached via email at .  

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