The Major Pros and Cons of a Safe Harbor Plan

The Major Pros and Cons of a Safe Harbor Plan

A Safe Harbor Plan is a retirement savings option that can provide numerous benefits for both employers and employees. It is a type of 401(k) plan that includes certain features designed to encourage employee participation and make it easier for employers to meet nondiscrimination requirements. While Safe Harbor Plans offer advantages, they also come with some drawbacks. In this blog post, we will explore the major pros and cons of implementing a Safe Harbor Plan.

Pros of Safe Harbor Plans:

1. Employee Retention and Recruiting:

One of the significant advantages of a Safe Harbor Plan is its potential to improve employee retention and recruitment. By offering a Safe Harbor Plan, employers signal their commitment to helping employees save for retirement, which can attract top talent and foster loyalty among existing employees. The peace of mind knowing that their retirement savings are being actively supported by their employer can make employees feel valued and more likely to stay with the company.

2. Increased Employee Participation:

Safe Harbor Plans have proven to be effective in increasing employee participation rates in retirement savings programs. Traditional 401(k) plans often face the challenge of low employee participation, resulting in a smaller pool of retirement savers. However, Safe Harbor Plans eliminate some of the barriers that deter employees from joining, such as fears of complex compliance rules or uncertainty about employer matching contributions. By offering automatic enrollment and mandatory employer contributions, Safe Harbor Plans incentivize employees to start saving for retirement.

3. Nondiscrimination Testing Relief:

Traditional 401(k) plans must undergo annual nondiscrimination testing to ensure that contributions made by highly compensated employees do not disproportionately benefit them when compared to the contributions made by non-highly compensated employees. This testing can be time-consuming and complex for employers. However, Safe Harbor Plans are exempt from these tests as long as they meet certain requirements. This relief provides convenience for employers and ensures that they are not penalized for having a disproportionate number of highly compensated employees participating in the plan.

4. Employer Contribution Flexibility:

Safe Harbor Plans offer employers flexibility in determining the type and amount of contributions they make to the plan. While the plan requires a specific level of employer contributions, employers have the option to choose between two types of contributions: a matching contribution or a nonelective contribution. This flexibility allows employers to tailor their contributions to align with their budget and financial capabilities while still providing valuable retirement benefits to their employees.

Cons of Safe Harbor Plans:

1. Increased Employer Costs:

While offering a Safe Harbor Plan can result in benefits for employers, it also incurs additional costs. Employers are required to contribute either a matching contribution or a nonelective contribution to the plan, which can strain their budget, especially for small businesses. Additionally, the cost of administering and overseeing the plan may be higher compared to a traditional 401(k) plan, as Safe Harbor Plans have more complex rules and requirements.

2. Limited Flexibility in Plan Design:

Safe Harbor Plans come with specific rules and requirements that employers must adhere to, limiting the flexibility in plan design. For example, employers must provide a specific notice to employees before the beginning of each plan year, and once the plan is established, it must remain in place for a full year. These restrictions may hinder employers who desire more control and flexibility in customizing their retirement benefit offerings.

3. Potential Disincentive for High Savings:

Safe Harbor Plans typically have a mandatory employer contribution, which can disincentivize highly compensated employees from making additional contributions to the plan. Since the employer’s contribution already satisfies the Safe Harbor requirements, highly compensated employees may feel less motivated to save higher amounts for their retirement. This can limit their ability to maximize their retirement savings and potentially result in a lower overall retirement income.


Safe Harbor Plans provide several benefits for both employers and employees, including improved employee participation, increased employee retention and recruitment, and relief from nondiscrimination testing. However, they also come with drawbacks, such as increased employer costs, limited plan design flexibility, and the potential disincentive for high savings among highly compensated employees. Ultimately, employers must carefully weigh the pros and cons before deciding whether a Safe Harbor Plan is the right retirement savings option for their organization.

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Fiduciary Advisors, Ltd. is a business-to-business associated pension administrator based in Phoenix, Arizona, since 1990. We specialize in designing and planning employee retirement programs, pensions, profit sharing, and are third-party administrators for 401K for small- to medium-size businesses. We conduct enrollment meetings, prepare detailed actuarial calculations, cash-balance plans, and financial consultation for all businesses. Give us a call today for more information!