Are Safe Harbor 401(k) Plans Subject to Top-Heavy Testing?

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Choosing a Safe Harbor 401(k) retirement savings plan can be highly advantageous for small businesses, allowing employers to:

  • Attract and retain top workforce talent
  • Eliminate the hassle of annual IRS compliance testing
  • Maximize contributions to their retirement savings
  • Lower tax liability

What nondiscrimination tests can Safe Harbor plans help you avoid?

While Safe Harbor 401(k) plans are exempt from ADP (Actual Deferral Percentage) and ACP (Actual Contribution Percentage) nondiscrimination testing by the IRS, they may still be subject to top-heavy testing. Small business 401(k)s with Safe Harbor provisions are generally EXEMPT from top-heavy testing if the plan only receives elective deferrals and safe harbor minimum contributions such as:

  • Matching employer contributions up to 4%.
  • Non-elective employer contributions of 3% of salary to every eligible participant, regardless of deferrals.
  • Auto-enrollment contributions up to a 3.5% match or 3% non-elective contribution.


When Is a Safe Harbor 401(k) Plan NOT Exempt from Top-Heavy Testing?

You will be subject to top-heavy testing in a given year IF:

  1. You have a lot of employees who are not eligible for Safe Harbor.

Eligibility requirements for Safe Harbor plans are longer than the eligibility requirements for an employee deferral plan. The following employees would not be eligible for the Safe Harbor exemption:

  • A former employee who worked less than one hour before moving to another job, but kept the 401(k).
  • Employees who are under age 21.
  • Employees who worked at the company for less than one year.
  • Employees who used to be key, but no longer meet the requirements.
  1. You made a profit-sharing contribution or forfeiture reallocation during the year.

Regardless of Safe Harbor status, a 401(k) plan must satisfy the top-heavy nondiscrimination test whenever profit-sharing contributions are made. However, following a pro-rata or permitted disparity formula can help pass this test.

  1. A match that’s NOT exempt from the ACP test is made during the year.

A non-exempt ACP and top-heavy match:

  • Is based on more than 6% of deferred compensation.
  • Exceeds more than 4% of deferred compensation in total.
  1. Voluntary non-Roth (after-tax) contributions are made during the year.

“Mega Back Door” 401(k) and IRA plans have been a popular way for high earners to shelter some of their salary from tax requirements. Retirement savers can set aside up to $61,000 per year, rather than the usual $20,500. While they will still have to pay taxes on the amount reserved when they take the money out during retirement, they can still benefit from tax-free growth in the meantime. However, it is important to note: Safe Harbor 401(k)s lose the top-heavy “free pass” when voluntary contributions are made to key employees.

What If My Safe Harbor Plan Is Top-Heavy?

As a small business 401(k) plan administrator, Ubiquity is here to help. We will help determine whether your plan is top-heavy each year. This occurs when more than 60% of the assets in the plan goes to key employees. A “key” employee is someone who is:

  • An owner with more than a 5% stake in the company
  • A spouse, child, or parent of someone who owns more than 5% of the company
  • An officer earning more than $200,000 annually, OR
  • A 1% shareholder earning over $150,000 annually

Contact Ubiquity to find the best type of 401(k) plan for your small business. Schedule your free Safe Harbor consultation to learn more.

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 300
San Francisco, CA 94104