Safe Harbor Plans Offer Options to Small Employers

Small business owners have embraced the strategy of offering a safe harbor 401(k) plan to simplify compliance with annual ADP/ACP and top heavy nondiscrimination testing. 

Eric Droblyen, president and COO of Employee Fiduciary, studied the 2,767 small business 401(k) plans for which the firm provides Employee Retirement Income Security Act (ERISA) compliance services and found 68% of plans use a safe harbor 401(k) plan design to avoid annual ADP/ACP and top heavy nondiscrimination testing.

In addition, a new comparability profit sharing contribution is most commonly combined with a safe harbor 3% non-elective employer contribution plan design. Traditional profit-sharing plan designs use either a flat percentage to allocate profits among participating employees, or an approach that is integrated with Social Security. By contrast, new comparability plans permit substantially higher levels of distributions to highly paid employees.

Droblyen’s analysis found pro-rata and integrated profit sharing contributions are most commonly combined with the 3% match-based safe harbor 401(k) plan designs.

Other plan design features among small business 401(k)s the analysis noted include:

  • Only 8.71% of plans automatically enroll employees that fail to make an affirmative enrollment election;
  • 65.96% of plans permit after-tax Roth 401(k) contributions;
  • 64.37% of plans permit non-safe harbor employer matching contributions; and
  • 85.65% of plans permit employer profit sharing contributions.