safe harbor

1. A regulation that protects individuals or corporations from the legal consequences of certain actions they undertake. For example, firms filing forecasts with the SEC have a safe harbor from individuals or businesses that use the forecasts and are subsequently damaged (that is, they lose money), as long as the forecasts were prepared in good faith. Taxpayers are offered safe harbor for favorable tax treatment of certain transactions by following guidelines issued by the Internal Revenue Service.
2. A tactic in which the target of an unfriendly takeover makes itself less attractive by taking a specific action. For example, a takeover target pays a large cash dividend to shareholders. See also scorched earth.

Case Study Federal legislation passed in 1996 allowed safe harbor 401(k) plans that eliminated the need for companies to undertake nondiscrimination testing. The program was particularly attractive to small businesses because it permitted owners and key employees to make maximum salary deferral contributions. Prior to this legislation that became effective in 1999, many small companies and professional firms elected not to participate in 401(k) retirement programs. Safe harbor plans require that an employer either match employee contributions (100% of each participant's first 3% of salary and 50% of the next 2% of salary) or provide a nonelective contribution equal to 3% of salary for all eligible employees. Matching contributions must be vested immediately, and distributions cannot occur until age 59 ¹/₂ or termination of employment, whichever occurs first. All employees at least 21 years old and with one year of service (1,000 hours) must be allowed to participate in a safe harbor 401(k) plan.