What Are Safe Harbor Retirement Plans?

A safe harbor retirement plan is a feature added to a 401(k) that allows a business to bypass annual nondiscrimination testing required by the Internal Revenue Service (IRS). To qualify, the employer agrees to make specific, mandatory contributions to their employees’ retirement accounts that follow prescribed formulas. Adopting these provisions helps companies ensure compliance with regulations and offer a valuable retirement benefit. This structure allows certain employees to maximize their own retirement savings without the risk of plan testing failures.

Satisfying Nondiscrimination Testing

Retirement plans like 401(k)s are subject to annual nondiscrimination tests to ensure they do not unfairly benefit certain employees over others. The IRS defines two categories for this purpose: Highly Compensated Employees (HCEs) and Non-Highly Compensated Employees (NHCEs). For 2025, an HCE is someone who owned more than 5% of the business or earned over $155,000 in the prior year. All other eligible employees are considered NHCEs.

The primary evaluations are the Actual Deferral Percentage (ADP) test and the Actual Contribution Percentage (ACP) test. The ADP test compares the average percentage of salary deferred by HCEs to the average deferred by NHCEs. The ACP test compares employer matching contributions and any after-tax employee contributions between the two groups. Specific mathematical limits govern how much the HCEs’ average can exceed the NHCEs’ average.

Failing these tests has direct consequences. The most common correction involves returning contributions to HCEs to bring the plan into compliance, which can negate some of their tax-deferred savings. A 10% excise tax may also apply if these refunds are not processed in a timely manner. Adopting a safe harbor plan design provides an exemption from both the ADP and ACP tests, avoiding these potential compliance headaches.

Mandatory Contribution Requirements

To qualify for the safe harbor exemption, an employer must commit to one of several specific contribution structures. These contributions are mandatory and are not subject to the employer’s discretion each year. The options provide different levels of cost, allowing a business to choose the formula that best fits its financial situation.

One option is the nonelective contribution. Under this formula, the employer contributes a minimum of 3% of compensation to all eligible employees, regardless of whether the employees contribute to the plan themselves. For example, an employee earning $60,000 would receive a $1,800 contribution from the employer, even if they defer nothing from their own paycheck.

A popular alternative is the basic matching contribution, which ties the employer’s contribution to the employee’s savings. The employer matches 100% of what an employee contributes on the first 3% of their salary, and then 50% on the next 2%. An employee earning $80,000 who contributes 5% of their pay ($4,000) would receive a total employer match of $3,200.

Employers can also implement an enhanced matching contribution, which must be at least as generous as the basic match. A common example is a 100% match on the first 4% of an employee’s deferred compensation. In this scenario, an employee earning $100,000 who contributes 4% ($4,000) would receive a $4,000 match from the employer.

Required Employee Notices and Deadlines

Employers must provide detailed information to employees and adhere to specific deadlines for establishing or modifying a safe harbor plan. These rules ensure that employees are fully informed of their rights and the plan’s features before the start of the plan year.

For plans using a matching contribution formula, the employer must provide an annual safe harbor notice to all eligible employees between 30 and 90 days before the start of each plan year. The document must explain the safe harbor contribution formula, other contributions available, withdrawal rules, and how employees can change their deferral elections. The SECURE Act eliminated this notice requirement for plans that only use a nonelective contribution.

The deadlines for implementing a safe harbor plan are important. A company establishing a new 401(k) plan with safe harbor features must have the plan effective by October 1st of the calendar year. For an existing 401(k) plan to add a safe harbor matching provision for the next year, the plan amendment must be adopted by the end of the current year. Deadlines are more flexible for adding a nonelective contribution, which can be added retroactively.

Vesting and Withdrawal Rules

A feature of safe harbor contributions is the vesting schedule, which dictates an employee’s ownership of the funds. Unlike other employer contributions that may require years of service before an employee is fully vested, safe harbor contributions are subject to more generous rules.

All employer contributions made under a standard safe harbor plan—whether nonelective or matching—must be 100% immediately vested. This means the employee has full ownership of the employer’s contributions as soon as they are deposited into their account. If the employee leaves the company, they are entitled to take the entire balance of the safe harbor contributions with them.

There are specific rules for Qualified Automatic Contribution Arrangements (QACAs), a type of safe harbor plan with an automatic enrollment feature. Employer contributions in a QACA plan can be subject to a two-year cliff vesting schedule, meaning an employee must complete two years of service to become 100% vested. Regarding withdrawals, safe harbor contributions are subject to the same restrictions as an employee’s own deferrals and cannot be withdrawn before age 59½ while employed, except in cases of financial hardship.