Satisfying ADP/ACP safe harbor rules

401(k) retirement plans are subject to nondiscrimination testing to make sure that all workers benefit from the plan — not just the owners, executives, or other highly paid employees. If your plan meets the safe harbor requirements, it will be deemed to have satisfied certain nondiscrimination tests.

Benefits of ADP/ACP safe harbor status

  • Automatically satisfies several nondiscrimination (ADP, ACP and top-heavy) tests.
  • Reduction in testing costs and administrative burdens.
  • Contributions of higher paid employees are subject to IRS limits, but are not dependent on, or limited by, the participation of lower paid employees.

Safe harbor requirements without Qualified Automatic Contribution Arrangements (QACAs)

  • Contributions — Employers must offer contributions in one of the following ways:
    • A nonelective contribution of at least 3% of income for all eligible employees
    • A basic match on elective contributions of 100% of the first 3% of income deferred and 50% on deferrals between 3% and 5% of income
    • An enhanced match on elective contributions at least as generous as the basic match (for example, 100% of the first 4% of income deferred). Matching contributions cannot exceed 4% of pay.
  • Vesting — Employer contributions must be fully vested immediately.

Safe harbor status through QACAs

Plans that automatically enroll employees may elect to use the special safe harbor rules under the QACA. Certain requirements must be met, including:

  • Deferral amounts — The rate of deferral for automatically enrolled employees must be at least 3% of pay until the end of the participant’s first full plan year, 4% for the second year, 5% for the third, and 6% thereafter. The rate cannot exceed 10%. You can set up your plan to escalate participant contributions automatically to meet the minimum deferral amounts.
  • Contributions — Employer contributions must be either one of these:
    • A nonelective contribution of at least 3% for all eligible employees
    • A match on elective contributions of 100% of the first 1% of income deferred and 50% on deferrals between 1% and 6% of income
  • Vesting — Employer contributions must be fully vested in two years or less.

Contribution adjustments and notification requirements

  • At plan year-end
    Contributions for both nonelective and matching safe harbor plans can be changed for the coming plan year provided that plan documents are amended with updated information and that employees receive reasonable advance notice of any changes. Notice can be given in writing or electronically. See our sample plan notices that you can customize to communicate to your employees.
  • During the plan year
    Nonelective safe harbor contributions can be reduced or eliminated during the plan year if the employer is operating at an economic loss or provides notice before the end of the plan year that changes may be forthcoming. This notice must state that any contribution changes will not take effect until 30 days after a supplemental notice is provided to participants about the changes. Previously, nonelective contributions could be eliminated only if the employer suffered a substantial business hardship.


    • Safe harbor matching contributions can be reduced or eliminated during the plan year if participants are notified in advance and if certain other conditions are satisfied.

    For plan years beginning after December 31, 2014, the rules for reducing or eliminating matching contributions will be the same as those for nonelective contributions.

Additional safe harbor information

Consult your attorney or Retirement Plan Coordinator for more details about the benefits and rules of safe harbor plans.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing.
All Capital Group trademarks mentioned are owned by The Capital Group Companies, Inc., an affiliated company or fund. All other company and product names mentioned are the property of their respective companies.
Use of this website is intended for U.S. residents only.
Capital Client Group, Inc.
This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.