What are Safe Harbor Plans?

A safe harbor 401(k) is a type of Internal Revenue Service-approved tax-deferred retirement plan. They are similar to traditional 401(k) plans but have specific requirements regarding vesting and employer contributions. The employer-advantages of not being subject to some traditional retirement plan tax rules can offset some of the employer-disadvantages of a safe harbor plan.

Nondiscrimination Testing

Traditional 401(k) plans are subject to rules that evaluate contributions by highly compensated employees, such as corporate vice presidents, versus contributions by non-highly compensated employees, such as production workers. These rules confirm that all employees of a company are fairly represented in a retirement plan. A Safe Harbor plan is not subject to this annual nondiscrimination testing.

Immediate Vesting

Advantageous to the employee is the immediate vesting of any employer contributions. Vesting refers to the employee’s ownership in the funds in the safe harbor 401(k) account. All contributions, the employee’s plus the employer’s contributions, are immediately 100 percent vested.

Employer Choice of Contribution Plan

The employer has a choice on making matching contributions. One choice is matching contributions of employees who defer income to the plan. The employer contribution can be 100 percent of deferred income up to 3 percent plus 50 percent of the next 2 percent. No matching employer contributions are allowed that would be more than 6 percent of the employee’s salary. The other option is making a minimum 3 percent contribution for all eligible employees, even those who do not contribute to the plan. This is called Safe Harbor non-elective contributions.

Employer Notice Requirements

Safe harbor plans have specific notice requirements. For example, the employer must give the employee information on her rights, a description of which method of contribution is used and how she can make contributions. This notice must be provided to the employee between 30 to 90 days before the start of the plan year..


Employees can contribute to the retirement plan using salary deferrals. In 2017, the maximum an employee can contribute is $18,500 with a catch-up additional amount of $6,000 if he or she is older than 50. The employer must make a matching contribution for employees who have salary deferred or can contribute 3 percent of the salaries of all eligible employees, whether they defer income or not. The maximum total amount of money that can be contributed is 100 percent of the employee’s salary or $55,000 for 2019."

Tax Advantages

For an employer, the contributions made to a safe harbor plan are tax deductible. For an employee, the contribution is not included in her annual income when calculating federal income taxes.