![]() The Actual Deferral Percentage (ADP) test: (These groups of high earners are referred to as highly compensated employees or HCEs.)Ī Safe Harbor plan is designed to pass the two required nondiscrimination tests that prove your plan is not providing a more significant benefit to HCEs than to the rest of your employees. There are three annual tests given by the IRS to make sure your plan is run fairly and benefits everyone–not just the people at the top. The business can take a tax deduction for employer contributions.The 401(k) plan is deemed to pass both IRS nondiscrimination tests, along with meeting the top-heavy minimum contribution requirements (see more below).The business owners and other high earners can maximize their retirement plan contributions without worrying about the contributions of lesser-paid employees.Under a Safe Harbor 401(k) plan, if the business owner makes a minimum contribution to their employees’ plan, the following occurs: ![]() Unfortunately, if the testing failure is not corrected promptly, the business owner will owe a 10% excise tax. ![]() If a plan is not a Safe Harbor 401(k) plan and fails either of these tests, the business owner must either return a portion of the contributions made to HCEs or make additional contributions for the lower paid employees. A Safe Harbor 401(k) plan is deemed to pass the two nondiscrimination tests that 401(k) plans must typically pass to prove that the plan is not providing a more significant benefit to HCEs which guarantee those who earn at least $150,000 per year or who own more than 5% of the company. ![]()
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