This is the time of year when most companies with calendar year plans start reviewing their discrimination test to see if they passed or if they have to refund any contributions to the highly compensated employee group. This has become even a bigger issue as more highly compensated employees look to increase their savings for retirement.

A leading reason corporations and business owners offer a qualified retirement plan to employees is to attract and retain sought-after talent. Yet, for a growing number of organizations, the plan has the opposite effect. This is because business owners and executives, who are generally among the most highly compensated employees — and often the key talent you’re seeking to retain the most — face a dilemma in planning for retirement.

While business owners and other highly compensated employees may want to maximize contributions as they plan for their future needs, the cost of contributions to cover other eligible employees can make traditional 401(k) and similar retirement plans costly. Couple that with the potential for annual refunds to highly compensated employees and the plan is hardly a tool for retaining these individuals.

Fortunately, a number of affordable and easy-to-implement solutions exist for businesses of all sizes. Safe harbor 401(k) provisions, class-based allocations for profit sharing plans, non-qualified plans and defined benefit plans for key executives and owners are among the many plan design solutions available to growing businesses seeking to remain competitive in today’s changing marketplace.

No one solution is best for any business and takes working with each company to determine the right one for them. Here are the characteristics you need to know if going down the safe harbor route:

Safe harbor 401(k) plan

A safe harbor 401(k) matching or non-elective contribution permits the plan to satisfy the actual deferral percentage (ADP) test applicable to employee deferrals while allowing HCEs to maximize their elective deferrals. (HCEs over age 50 or who reach age 50 during the plan year may make additional elective catch-up contributions.) However, there are some strings attached to these advantages:

  • All safe harbor contributions are immediately 100% vested (unless the plan is a qualified automatic contribution arrangement safe harbor 401(k))
  • All eligible participants must receive a safe harbor contribution, even if they do not meet service requirements (i.e., work 1,000 hours during the plan year and/or be employed on the last day of the plan year).

In addition, many safe harbor 401(k) non-elective contribution plans are designed to be exempt from top-heavy rules. The safe harbor rules require that a non-elective contribution of at least 3% be made to all eligible non-key employees. To be exempt from the top-heavy rules, no other non-elective contributions may be made. Generally, a plan should have the same service requirements for both elective deferrals and safe harbor contributions; it will not be exempt if it permits a shorter period of service for eligibility for elective deferrals than for safe harbor contributions.
This is just one option in the evolving retirement plan market place to help the highly compensated employees with their retirement planning.

This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.

Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.

Ludwig, ChFC, AIF, CRPS, is a financial adviser with LHDretirement. Reach him at

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