What is the primary purpose of the 401(k) safe harbor provision?

The primary purpose of the 401(k) safe harbor provision is to eliminate the need to pass the Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, which are designed to ensure that retirement plans do not disproportionately favor highly compensated employees over lower-paid employees. By adopting a safe harbor provision, a plan sponsor can provide a specific level of employer contributions—either through matching contributions or non-elective contributions—to participants, which automatically satisfies the nondiscrimination requirements.

This allows employers to avoid the complexities and administrative burdens associated with conducting annual tests to prove that their plan is equitable across all employee compensation levels. Consequently, the safe harbor provisions encourage greater participation among employees, as they can have more confidence that their contributions and those of their coworkers will be treated fairly without the concern of failing these tests.

The other choices address different aspects of retirement plans but do not accurately reflect the main goal of the safe harbor provision. For example, while increasing employer contributions and allowing in-service withdrawals may be desirable features of a retirement plan, they do not encompass the core objective of the safe harbor. Similarly, providing guaranteed retirement income involves different mechanics, such as annuities or pension structures, which are not linked to the purpose of the 401