The safe harbor 401(k) Plan is ideal for a client who wants to avoid the burden of the discrimination test and the possibility of corrective distributions to the client’s highly compensated employees due to poor participant by the other (non-highly compensated employees).

In order to be exempt from the discrimination test, the Plan must provide for either of the following two (2) employer contributions.

(1) An employer contribution of 3% of compensation made on behalf of each non-highly compensated participant. The contribution is required to be 100% vested immediately – there is no requirement that the participant makes an elective contribution to receive this employer contribution.

(2) A matching contribution of 100% of the first 3% of compensation deferred and 50% of the next 2 % of compensation deferred. So, a participant deferring 5% of compensation, will receive an employer matching contribution of 4% of compensation which is 100% vested immediately.

This type of Plan is ideal in the small closely-held business, where both the owner and spouse are on payroll, and the other employees do not defer in a robust manner. The owner and spouse can defer the full limit for the tax year ($18,000 in 2017), and the catch-up amount ($6,000 in 2017), with a small contribution as stated above for the other employees.

Leave a Comment