If the highly compensated employees (HCEs) at your company are limited in the amount they can defer in the 401(k) plan due to the IRC Section 401(k) ADP and/or IRC Section 401(m) ACP nondiscrimination testing requirements, then a safe harbor contribution may be a good fit for you. If you make a safe harbor contribution then you are deemed to satisfy the nondiscrimination testing requirements. In addition to automatically passing the testing, you may reduce your 401(k) compliance testing expenses by not having to perform the test(s).

Generally a safe harbor contribution can be satisfied with a 3% nonelective contribution, a 4% (100% up to 3% and then 50% for the next 2%) matching contribution, or a QACA (Qualified Automatic Contribution Arrangement).

You are allowed to make the safe harbor contribution in the ESOP. This means that you can designate contributions that you would have otherwise made (e.g. loan payments) as safe harbor contributions, enabling you to make the safe harbor contribution in the form of stock with no additional cash outlay. If you are not leveraged, you could make the contribution directly in the form of shares, again with no cash outlay (though there would be dilution if the company is not 100% ESOP owned).

In order to satisfy the safe harbor requirements an annual safe harbor notice must be provided to the participants. The notice must be provided between 30 and 90 days before the first day of the plan year, and employees who become eligible after the notice period must receive the notice by their date of eligibility. December 1 is the Safe Harbor Notice Deadline for December plan years.