Question

Section 401(k) plan does not have to satisfy the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests if it meets one of the safe harbor provisions. What are the provisions?

Answer 1

To avoid the ADP and ACP tests, a 401(k) plan can meet one of the two safe harbor provisions. The first provision involves the employer matching a portion of the employee's salary deferrals, while the second provision requires the employer to make a non-elective contribution to all eligible employees. By satisfying these provisions, the plan is exempt from the tests and ensures fair distribution of benefits.

Step-by-step explanation:

In a 401(k) plan, the actual deferral percentage (ADP) and actual contribution percentage (ACP) tests can be avoided if the plan meets one of the safe harbor provisions. The safe harbor provisions are:

1. The employer matches 100% of the employee's salary deferrals up to 3% of the employee's compensation, and 50% of the employee's salary deferrals between 3% and 5% of their compensation.
2. The employer makes a non-elective contribution of at least 3% of the employee's compensation to all eligible employees, regardless of whether the employee makes salary deferrals.

By satisfying these safe harbor provisions, a 401(k) plan is considered to pass the ADP and ACP tests automatically, ensuring equitable benefit distribution among all employees.