Safe Harbor and Non-Safe Harbor PEP Options

Written by The Peppermint Team

Peppermint was created by a group of business owners, entrepreneurs, and benefits experts who have been on both sides of the table as employees and employers.

September 2, 2021

Thinking of investing in retirement differently? You’re not alone. With better (and more effective) cost-saving measures, Pooled Employer Plans (PEPs) are growing in popularity.


But, before you start a new 401k, make sure you understand the different types of PEP options available and how one could impact you. To make this decision easier, we’ve outlined everything you need to know about PEPs to make a more informed decision.


Pooled Employer Plans


The Setting Every Community Up for Retirement Enhancement Act (SECURE) came into effect on January 1, 2021. This groundbreaking legislation makes it easier, cheaper, and quicker for small businesses (typically 100 employees or less) to invest compared to traditional stand-alone 401k plans.

Known as Pooled Employer Plans (PEPs), a plethora of employers can pool their money together to invest in a single 401k plan. This offers employees a better vehicle for their retirement plans. Additionally, it also typically gives them more investment options, modern features, tools, and advice that wouldn’t be offered otherwise.

Being able to offer more flexible benefits not only keeps current employees happy, but it’s also more attractive to potential hires.

This type of plan is also less complicated and risky to manage because participating employers have less responsibility for managing it. Instead, each PEP has a Pooled Plan Provider (PPP), which acts as the PEP’s ‘plan administrator’ as defined in Section 3(16) of ERISA.

Since it’s the Pooled Plan Provider who runs the PEP, the fiduciary responsibility (and all administrative duties) shifts to them. Employers only have to monitor the plan providers, making it easier to make decisions, minimize risk, and lower administrative costs. This results in a more efficient workflow and a higher overall satisfaction level.

What is a Safe Harbor PEP? 


A safe harbor 401k plan is another type of 401k. The main difference is that it includes a ‘safe harbor’ provision.

Having a ‘safe harbor’ designation benefits employers, as it eliminates legal responsibility (if certain criteria are met). According to ERISA Section 404(c), a fiduciary safe harbor is designated for investments directed by plan participants. This means that participants in the plan are not treated as fiduciaries, which relieves them of responsibility and liability.

Many employees see the perks of having a safe harbor plan, as it protects them from compliance concerns, and, in turn, offers a simplified product since they don’t have to interpret policies or laws.

Why Choose a Safe Harbor Plan? 


Many businesses opt for this particular plan because it helps companies pass 401k non-discrimination tests.  

Given that these plans make it easier to pass the annual IRS testing, they are ideal for companies that have high-earning employees who want to contribute more to a plan without risking a non-discrimination testing failure; the provisions could protect them from it.

It’s also beneficial for employers whose 401k plans have a low level of engagement or whose plans are ‘top-heavy’ (where 60% or more of the plan assets are allocated to high-earning employees). 


Choosing this plan means that companies won’t have to restrict employee contributions, so high earners can freely invest. In addition, the match in investment will likely attract lower-earning employees to join, resulting in a tax-deductible investment and higher employee engagement and satisfaction.

Non-Safe Harbor PEPs

When compared to safe harbor plans, a non-safe harbor plan tends to have fewer restrictions, but it does carry more risk.


With this type of plan, though, employer contributions are not required; these plans are therefore subject to annual non-discrimination testing.


Non-safe harbor plans also give the employer the option to make contributions on behalf of all participants, making matching contributions based on employees’ elective deferrals, or both. However, if an employer opts to make contributions subject to a vesting schedule, an employee’s right to the contributions becomes nonforfeitable after a period of time. This creates an incentive for the employee to stay with the organization.

Non-Discrimination & Compliance Testing 

There are two major types of non-discrimination tests, and a compliance test. All three are required by the IRS when it comes to non-safe harbor PEPs; these tests ensure that the 401k plans being offered benefit both owners and employees.


These tests are known as the Actual Deferral Percentage (ADP) and the Actual Contribution Percentage (ACP) tests. Essentially, they are designed to verify that deferred wages and employer matching contributions do not discriminate in favor of highly compensated employees.


The first test is the Actual Deferral Percentage (ADP) test. This test measures how much income higher-earning employees contributed to their 401k compared to others at the company. The second test, which is similar, is the Actual Contribution Percentage (ACP) test, but it compares the contributions of the highest-earning employees with everyone else’s contributions.


Finally, there is a compliance test known as the Top-Heavy Test where the IRS looks at what they define as ‘key’ employees. They take the value of assets in the ‘key’ employees’ 401k accounts and compare it to all assets held in the 401k plan to determine if what’s being offered is equitable.

What’s Right for You? 


If you’re thinking of starting a retirement plan for your company, consider speaking with a member of our team. Peppermint offers different options, and working with us means you don’t have to worry about retirement plan administration and audits; we’ll take care of it for you.

Working with us means you don’t have to worry about retirement plan administration and audits; we’ll take care of it for you.  


Our solution offers the flexibility to support any member base of any size with any requirements. Get in touch with us by phone at 844-399-8890 or by email at so we can tailor the right platform solution that you and your members deserve.   


The peppermint blog assumes no responsibility or liability for any errors or omissions in the content of this site. The information contained in this site is provided on an “as is” basis with no guarantees of completeness, accuracy, usefulness, or timeliness. It does not represent or replace actual financial advice provided by a certified financial professional. Since everyone’s situation is different, we always recommend addressing specific questions to your plan provider or certified financial professional. As such, peppermint may not be held liable for your use or reliance on any information contained herein.

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