Safe harbor 401(k) plans are the most popular type of 401(k) sponsored by small businesses today. They can automatically pass Actual Deferral Percentage (ADP), Actual Contribution Percentage (ACP), and top heavy testing, which helps business owners maximize personal contributions. To achieve safe harbor status, a business must meet certain employer contributions and participant disclosure requirements. For many owners, that trade-off is well worth the cost. Here’s why:
When 401(k) nondiscrimination tests fail, it’s usually business owners that bear the brunt of the consequences. They often receive the largest contribution refunds when the ADP or ACP test fails and make a 3% contribution to non-owners when their plan is top-heavy.