How to Avoid 401k Nondiscrimination Testing

One way to avoid 401k nondiscrimination testing is to set up a safe harbor 401k. This is a special type of 401k account that is not subject to the nondiscrimination testing at any point. This type of 401k is very similar to a traditional 401k with a few key differences.

Vested Contributions

One of the big differences between a regular 401k and a safe harbor 401k is the vested contributions. When you make a contribution to your employees' retirement accounts, they have to be 100 percent vested immediately. With a traditional 401k, you can use a vesting schedule that will prevent the employees from having full access to the money immediately. 

Full Match

With this plan, you also have to make a 100 percent matching contribution to your employees' accounts. You have to match their contributions up to 3 percent of their annual incomes. With a regular 401k, you can decide how much you want to contribute, and the amount is up to your full discretion.

Similarities

The rest of the features of the safe harbor 401k are just like those of the regular 401k. Your employees can still make tax-deductible contributions, and you still get a tax deduction for matching their contributions. You just do not have to worry about the nondiscrimination testing.

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