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Why You Should Have a Safe Harbor 401k Plan for Your Employees

If your company has a 401k plan, you are probably intimately familiar with the compliance tests administered by the IRS. These tests are in place to make sure that no one within a company’s retirement plan is treated unfairly. However, it can be tough to maintain compliance with these tests unless your plan is structured in a very particular way.

This is where the Safe Harbor 401k comes into play. This type of plan is specifically designed to be in compliance with the IRS testing requirements.

Let’s take a look at the IRS tests in question and see how the Safe Harbor plan allows you to quickly and easily bypass these tests each year.

IRS Testing

There are three tests which the IRS uses to determine where 401k plans are unfairly prioritizing certain employees within a company. The tests are as follows:

  • The ACP Test: The Actual Contribution Percentage Test is designed to check whether employer matching amounts are more favorable to the higher-wage employees within a company.
  • The ADP Test: The Actual Deferral Percentage test ensures that there is a maximum percentage of salary which can be deferred into the retirement fund of higher-compensated employees as compared to the percentage deferred by lower-wage employees.
  • The Top-Heavy Test: The Top-Heavy Test is administered to check whether the owner of the company and the most highly-paid workers maintain greater than 60% of the plan’s balance. If so, the plan would be considered top-heavy.

Hopefully you never have to find out specifically what happens after a failed test. Suffice it to say that that the ordeal is filled with paperwork and fines which are time-consuming and frustrating for everyone involved.

Does a Safe Harbor Plan Really Help Businesses Pass the IRS Tests?

A safe harbor 401k plan is designed solely for the purpose of ensuring that businesses pass these IRS tests. The plan requires businesses to make nonelective contributions or make basic/enhanced matching contributions to every eligible 401k account.

With a Safe Harbor 401k provision, a business can rest easy knowing that they are in compliance with all IRS requirements.

How Do I Set Up a Safe Harbor 401k Plan?

As we near the end of the year, it’s unfortunately too late to set up a new safe harbor 401k plan. The deadline for the creation of new plans was October 1st of 2021. Also, to add a safe harbor provision to a plan that is already in place, the deadline was November 30th.

So, 2022 will likely not include a safe harbor 401k plan for your business. However, if you are interested in starting one for 2023, you should reach out to a plan provider and start the process now. It’s never too early to get the ball rolling on these plans, and you’ll be glad you did so.


A Safe Harbor 401k plan is a surefire way to reduce the stress associated with annual IRS compliance testing. If you’re interested in starting a plan for 2023, call a plan provider today to set up an appointment!

Mccoy Emory
the authorMccoy Emory