What is the requirement for a traditional ADP safe harbor matching contribution based on deferrals?

The requirement for a traditional ADP safe harbor matching contribution based on deferrals is that employers must provide at least 100% of the first 3% of employee deferrals, plus 50% of the next 2% of employee deferrals. This structure is designed to encourage employee participation in the retirement plan while ensuring that the contributions are favorable for lower-paid employees.

The rationale behind this design is to ensure that matching contributions remain beneficial and compliant with non-discrimination testing requirements, which ensures that the plan does not favor highly compensated employees disproportionately over non-highly compensated employees. By providing a higher match on the initial three percent and a lesser match on the next two percent, it strikes a balance that can help with meeting the safe harbor requirements while also incentivizing employees to contribute.

This safe harbor formula allows for a predictable funding approach for employers and assures employees that they will receive a significant benefit when they contribute to their 401(k) plans.