401(k) Plans

401(k) plans are among the most popular and flexible retirement plan options available to employers. These plans allow employees to defer a portion of their salary—on either a pre-tax or Roth (after-tax) basis—into an employer-sponsored retirement account. Employers may choose to make matching or discretionary contributions, providing a valuable incentive to attract and retain talent.

There are two primary types of 401(k) plans:

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Traditional 401(k) Plan

A traditional 401(k) plan allows employees to make elective deferrals through payroll deductions, with the option for employers to provide matching or profit-sharing contributions. These plans are subject to annual non-discrimination testing (ADP and ACP tests) to ensure contributions do not disproportionately favor Highly Compensated Employees (HCEs).

This testing can impact how much HCEs are allowed to contribute based on the participation and contribution rates of non-HCEs. As such, careful plan design and participant education can be critical to maintaining plan balance and compliance.

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Safe Harbor 401(k) Plan

A Safe Harbor 401(k) plan offers the same salary deferral and employer contribution options as a traditional 401(k), but with a key difference: it is exempt from the annual ADP/ACP testing requirements, provided the employer makes a mandatory contribution that meets IRS Safe Harbor standards.

Employers must commit to one of the following contribution formulas:

  • Matching Contribution: A standard safe harbor match typically provides a 100% match on the first 3% of employee deferrals, plus 50% on the next 2%. Plans may also use approved enhanced safe harbor match formulas that meet IRS requirements.

  • Nonelective Contribution: A flat 3% contribution of compensation to all eligible employees, regardless of whether they contribute to the plan.

Safe Harbor contributions must be fully vested immediately. This structure simplifies administration and ensures that Highly Compensated Employees can maximize their contributions without concern for testing limitations.

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