The Fix · Safe Harbor Redesign
Your 401(k) returned your money. Taxed.
Every spring, thousands of owner-led firms (dental and medical practices, law and accounting firms, specialized trades) get a “corrective distribution”, which means their own retirement savings are mailed back to them, taxable, because their plan's design can't pass a fairness test its seller never ran. The letter says it's normal. It's normal for undesigned plans.
Source: Form 5500-SF (public record)
From a real Florida dental practice's public filing, 2025 plan year. Anonymized, and illustrative of the pattern rather than of your plan:
| Line item | Amount |
|---|---|
| Contributed by employees as salary deferrals | $89,464 |
| Returned as corrective distributions, taxed as income | $23,209 |
| Refunds paid in the year, as a share of that year's deferrals | 26% |
The figures are lines 8a(2) and 8e of the filing, which reports no participant loans. Refunds paid in a year usually correct the prior year's test.
The fix, in three lines.
- 01
A safe-harbor contribution to staff can take the annual test off the table.
- 02
Your $24,500 per owner (the 2026 limit) is secured no matter what your team saves.
- 03
For plans established in 2024 or later, federal startup credits can offset some or all of the cost; for some, the fix is better than free in year one.
The IRS nondiscrimination test compares savings rates across the workforce. When owners save more than the team, the excess is refunded to them and taxed. A safe-harbor structure, with an added team contribution, can usually keep annual-testing refunds in the plan. Refunds tied to participant loans are different and aren't prevented this way.
Fixing the test is the first step. Designing the right 401(k) is where the bigger opportunity may be.
- 01
Fix. Address the annual testing problem. A safe-harbor structure can help prevent recurring corrective refunds and let owners retain their planned contributions, subject to plan rules and implementation.
- 02
Design. Create more room for the owners. Use the new structure as the foundation for a broader redesign, potentially allowing significantly larger owner retirement contributions while continuing to provide benefits for employees. See the designed 401(k).
The initial change may require additional funding for the team. The opportunity is to design the overall plan around the owners' contribution goals and the practice's economics, rather than evaluating the safe-harbor change in isolation.
Switched on by Dec 1, this year doesn't have to end the same way
What we need to confirm it.
Employee ages + compensation + ownership, and confirmation that the refunds came from annual testing.
Fee: $2,500–3,500/yr flat
Flat fees. No asset charges. No revenue sharing.
For plans established in 2024 or later, the SECURE 2.0 administration credit can offset some or all of our fee for the plan's first three tax years. It covers up to 100% of eligible costs at employers with 50 or fewer employees, and the cap depends on your headcount. And as the plan grows, the fee doesn't.
Figures from public Form 5500 filings. Your figures come from your census. Not legal or tax advice.
What happens next
We spend 20 minutes reviewing whether the opportunity could work for your practice.
Your CPA is welcome. If the numbers make sense, the next step is a $2,000 flat-fee design study using your actual workforce data.
If the numbers don't work, we'll tell you.