Which method for allocating nonelective employer contributions is considered nondiscriminatory?

The nonelective employer contributions in a 401(k) plan must adhere to certain nondiscrimination requirements to ensure that they do not favor highly compensated employees over non-highly compensated employees. The permitted disparity method allows for differences in contribution rates based on compensation levels while still being compliant with nondiscrimination rules.

This method is designed to allow higher contributions for higher earners (within limits) as long as they do not lead to the plan violating the nondiscrimination tests set by the IRS. This makes it a suitable option for employers who want to structure their retirement contributions without discrimination against lower-paid employees.

In contrast, the average benefit test and the safe harbor method, while they serve important functions, do not specifically focus on allowing disparities in percentages based on employee classifications as the permitted disparity method does. The average benefit test is more about assessing the overall average benefits received by employees, while the safe harbor method is an approach used to simplify compliance with nondiscrimination requirements—but it does not inherently allow for the same level of disparity as the permitted disparity method.

The compensation ratio method also does not provide the same level of flexibility to accommodate non-discriminatory contributions across different compensation levels while still adhering to regulatory requirements. Thus, the permitted disparity method stands