Is there a way around the ADP test, which ties the Owner/Highly Compensated Employees salary deferral amounts to the employees deferral amounts?
Yes. Congress, in recent years, developed a “buy-out” option from the ADP discrimination test by allowing plans to make what they call a “safe-harbor” matching contribution, or alternatively, a “safe-harbor” non-elective contribution. By making one of these “safe-harbor” contributions, the employer “buys-out” of the ADP testing and thereby “de-links” the owner/highly paid employees ability to defer salary, with what the rank-and-file staff is deferring. Safe-Harbor Match: If this method is used, the employer must make a fully vested 100% match for each employee that defers salary, equal to a 100% match on the first 3% of salary deferral, plus an additional 50% match on the next 2% of each employees salary deferral. Therefore, the maximum match for any one employee will equate to 4% of pay (100% of 3% plus 50% of next 2%) even if the employee was to defer a significant percent (e.g. 20%) of their pay. Safe-Harbor Non-Elective: If this method is used, the employer must make a 3% of salar
Related Questions
- Is there a way around the ADP test, which ties the Owner/Highly Compensated Employees salary deferral amounts to the employees deferral amounts?
- Our highly compensated employees received refunds with the Contribution Nondiscrimination Test. How can our plan be top heavy?
- How do highly compensated employees report the return of excess contributions due to a failed discrimination test?
