Employers periodically consider implementing safe-harbor plans to avoid failure of the nondiscrimination tests. This result is desirable, since employers prefer not to return excess contributions that exist upon failure of the actual deferral percentage and actual contribution percentge tests to highly compensated employees. If such actions occur, HCEs are generally unable to achieve their retirement savings goals, which often leads to dissatisfaction.
The traditional safe-harbor profit-sharing contribution is the easiest way to satisfy the nondiscrimination rules. All eligible employees receive a fixed profit-sharing contribution equal to 3% of compensation, which is 100% vested. As a result of this contribution, the ADP/ACP tests aren’t required to be satisfied, and the 3% top-heavy contribution is also satisfied for plans where more than 60% of all account balances are attributable to key employees. In order to establish a safe-harbor profit-sharing plan, all employees must receive the contribution, and allocations may not be limited to individuals who work 1,000 hours or are employed on the last day of the calendar year.
