If you offer your team a 401(k) plan, you already know how valuable it is for attracting and keeping great people. But did you know the IRS has rules to make sure these plans don’t just favor owners or top executives? That’s where nondiscrimination testing (commonly referred to as ADP/ACP tests) comes into play.
Failing Tests
Every year, most 401(k) plans have to go through these tests to compare how much highly compensated employees (owners or folks earning over $160,000 in 2025) are saving compared to everyone else. If the gap is too big, the plan fails the test.
What happens if the plan fails the tests at the end of the year? Usually, it means you’ll have to refund contributions to your higher-earning employees or give additional contributions to the rest of your team. Neither option feels good. Refunds frustrate executives who are simply trying to contribute as much as possible, and making extra contributions can catch a business off guard with an unexpected expense. On top of that, repeated failures can invite extra IRS attention, and let’s face it, no one wants that.
The good news is, there is a way to limit your worry of failing: Safe Harbor plans
How Safe Harbor Helps
A Safe Harbor plan is designed to automatically pass the ADP/ACP tests. To qualify, the employer commits to making minimum contributions to employees’ accounts. That might be in the form of a straightforward match (for example, dollar-for-dollar on the first 3% an employee contributes, plus 50% on the next 2%), or a flat contribution of at least 3% of pay for every eligible employee, called non-elective contribution.
Why does this matter? First, your leadership team can contribute the maximum allowed by the IRS without worrying about the plan receiving the dreaded fail at the end of the year. And second, the rest of the employees that participate receive added benefit in the form of the match.
Yes, adopting a Safe Harbor plan does mean a financial commitment from the company. But in return, you get peace of mind about compliance, happier employees, and a stronger benefit offering to attract and retain talent.
401GO and Safe Harbor Plans
Nondiscrimination testing is a necessary part of keeping 401(k) plans fair, but with a Safe Harbor plan, you can skip the stress, keep the IRS happy, and help every employee save with confidence.
Securing a Safe Harbor 401(k) from a reliable provider can make all the difference. Choose one that has a modern platform, excellent customer support, and the flexibility to work with your financial advisor, if you have one. Choose 401GO.
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