Many employers are all too familiar with the experience of having to refund contributions made to the organization’s 401(k) plan by highly compensated employees to remedy the previous year’s failed actual deferral percentage (“ADP”) test. The ADP test is designed to ensure that the average deferral rates for highly and non-highly compensated employees are roughly equal. Thanks to the Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”), the experience of refunding highly compensated employees’ deferrals in order to satisfy the ADP test will in many cases be consigned to history. The below addresses how the SECURE Act relaxes some of the rules affecting 401(k) plan testing.

Q: Can a 401(k) plan retroactively avoid ADP testing?

The year 2021 presents for the first time the opportunity to retroactively escape the prior year’s ADP test without regard to the extent by which contributions from highly compensated employees exceeded the average deferral percentage contributed by the organization’s non-highly compensated employees. Under the SECURE Act, it is now possible to adopt a safe harbor nonelective 401(k) feature that will exempt the plan from ADP testing with respect to the previous year. Unlike in the past, a notice to participants before the beginning of the year in which the safe harbor nonelective contribution applies is no longer required. As such, employers can now wait until the end of the year, or even longer, before deciding whether to make a safe harbor nonelective contribution for the year.

Q: How are safe harbor nonelective contributions similar to, or different from, safe harbor matching contributions?

A safe harbor nonelective contribution takes the form of a plan contribution by the employer on behalf of all eligible plan participants, regardless of whether they elect to defer any of their compensation into the plan. It differs from the similarly purposed safe harbor matching contribution, which also exempts the plan from ADP testing, but entails contributions by the employer on behalf only of participants who have elected to defer. A safe harbor match cannot be adopted with retroactive effect because participants must be afforded adequate time before the plan year begins to decide whether they want to take advantage of the safe harbor match feature by electing to defer some of their compensation.

Therefore, employers utilizing a safe harbor match are still required to furnish notices explaining the feature at least 30 days before the beginning of the plan year. Unlike the safe harbor nonelective contribution, a safe harbor match provides a direct incentive for employees to make elective deferrals, since they receive the employer contribution only if they defer part of their compensation into the plan. For both types of safe harbor contribution, if the employer elects, it can limit the contribution to only non-highly compensated employees.

To satisfy the nonelective safe harbor, the employer contributes to the plan an amount equal to a flat percentage of each participant’s compensation, either 3% or 4%, depending on the timing of the safe harbor’s adoption. For a calendar year plan, a 3% nonelective safe harbor contribution adopted on or before December 1 will exempt the plan from ADP testing for the year of its adoption. If the nonelective contribution feature is adopted after December 1 of any year and not later than December 31 of the following year, the plan will be exempt from ADP testing for the first of those years if the contribution rate for that year is 4% instead of 3% of compensation.

Q: How does a plan qualify in 2021 for exemption from a failed 2020 ADP test?

A failed ADP test for the 2020 plan year can be retroactively eliminated by adopting by December 31, 2021, a 4% nonelective safe harbor contribution with respect to participants’ 2020 compensation. In many instances, an employer may already have in place a practice of making an annual profit sharing contribution on behalf of all plan participants that approaches or even exceeds this level, so designating the contribution a safe harbor nonelective contribution can be made at little or no additional cost to the employer. It should be noted, however, that to the extent an amount serves as a safe harbor contribution, it will not be subject to any otherwise applicable vesting schedule for employer contributions under the plan.

Q: What timeline applies in future years for employers adopting a safe harbor nonelective contribution?

More generally, the new rules permit a plan sponsor to wait until after the end of any plan year, when it can assess whether or not the plan passed ADP testing, before deciding whether to make a safe harbor nonelective contribution that will exempt the plan from testing for that year. Retroactive availability of the exemption assures that highly compensated employees will be able to contribute up to the deferral limit established by law, currently $19,500, or $26,000 for participants age 50 or older, without regard to the rate of elective deferrals made by non-highly compensated employees. Pursuant to the SECURE Act, the employer could delay as long as until December 31 of the next year before adopting a safe harbor nonelective feature, provided it is made at a 4% level.

Q: Can a safe harbor feature be turned on or off, or switched to a different type of safe harbor?

With few exceptions, once a safe harbor feature is adopted with respect to any year, it must remain effective for the entire year. However, so long as plan documents are properly drafted and maintained, the adoption of a safe harbor feature with respect to any year will not commit the employer to a similar contribution for any other year. An employer could adopt a safe harbor nonelective contribution for one year and have no safe harbor the next, or might instead opt for a safe harbor matching contribution feature, provided the required advance notice to participants is furnished. With respect to any year for which no safe harbor is adopted, the employer has until December 31 of the following year to change its mind and retroactively adopt a safe harbor nonelective contribution for that year.

Employers seeking assistance with 401(k) plans may contact me at or by phone at 239-344-1192.