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401(k) Safe Harbor Plans

In response to employer concerns over ADP testing, a new trend in 401(k) planning is the adoption of a “safe harbor” structure which allows the plan to avoid having to do ADP testing. Under the safe harbor method, plans can forego the ADP testing in exchange for making a 3% contribution for all participants, or a 4% graded matching contribution formula for participating employees. Another drawback to safe harbor contributions is that they are 100% vested. Nevertheless, for the right situation (such as plans which may otherwise be seriously limited by ADP testing, or plans which are top-heavy) a safe harbor plan can be very beneficial. Safe harbor plans are flexible because the employer can decide as late as 30 days before year end whether to apply the 3% safe harbor formula or perform ADP testing.

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Information is provided for review and consideration only. Please consult legal and tax advisors for practical advice pertaining to your business and personal situations.

This page was last reviewed and/or updated on Friday, July 03, 2015 05:22 PM

 

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