In Part 2 of this series, we discussed that 401(k) plans are a good retirement plan to consider when trying to attract and retain top talent for your business.
But what are your 401(k) plan options? There are actually quite a few and we provide practical pointers to help you understand why a business might choose one plan over the other.
401(k) – This is the most common retirement plan offered today. 401(k) plans allow employees and owners to defer up to $22,500 of their compensation on a pre-tax or after-tax basis. After-tax deferrals are called Roth deferrals and have special tax treatment. The 401(k) plan requires NO EMPLOYER CONTRIBUTIONS.
SIMPLE IRA* – This plan is technically not a 401(k) plan, but it is similar in that it allows employees to make contributions to a plan from their pay, but only up to $15,500 ($7,000 less than the 401(k) plan). It is typically used when a business wants to keep administrative costs low and is willing to make a REQUIRED EMPLOYER CONTRIBUTION.
SIMPLE 401(k)* – This plan provides almost identical benefit options as the SIMPLE IRA, but with added administrative requirements. Since there are typically no upsides to this option and only additional administrative burden, this type of plan is rarely used.
SAFE HARBOR 401(k) – This plan is the same as the 401(k) plan first mentioned above, but the business commits to making a SAFE HARBOR EMPLOYER CONTRIBUTION. Why does a business choose this option? Because without it, certain highly-paid individuals may have a portion of their 401(k) deferrals returned if other employees aren’t saving enough.
LET’S SUMMARIZE THE KEY DIFFERENCES:
| Plan Type | Maximum Deferral | Additional Deferral if age 50+ | Required Employer Contributions | Plan Document Required? | Government Form 5500 Filing Required? |
|---|---|---|---|---|---|
| 401(k) | $22,500 | $7,500 | NO | YES | YES |
| SIMPLE IRA | $15,500 | $3,500 | YES | Can use IRS form | NO |
| SIMPLE 401(k) | $15,500 | $3,500 | YES | YES | YES |
| SAFE HARBOR 401(k) | $22,500 | $7,500 | YES | YES | YES |
401(k)
Plan Type: 401(k)
Maximum Deferral: $22,500
Additional Deferral if age 50+: $7,500
Required Employer Contributions: NO
Plan Document Required? YES
Government Form 5500 Filing Required? YES
SIMPLE IRA
Plan Type: SIMPLE IRA
Maximum Deferral: $15,500
Additional Deferral if age 50+: $3,500
Required Employer Contributions: YES
Plan Document Required? Can use IRS form
Government Form 5500 Filing Required? NO
SIMPLE 401(k)
Plan Type: SIMPLE 401(k)
Maximum Deferral: $15,500
Additional Deferral if age 50+: $3,500
Required Employer Contributions: YES
Plan Document Required? YES
Government Form 5500 Filing Required? YES
SAFE HARBOR 401(k)
Plan Type: SAFE HARBOR 401(k)
Maximum Deferral: $22,500
Additional Deferral if age 50+: $7,500
Required Employer Contributions: YES
Plan Document Required? YES
Government Form 5500 Filing Required? YES
By clicking on the “Plan Type” above, you can gather more details on the unique characteristics of each plan. Once you have a general understanding, it is always best to work with a Third-Party Administrator (TPA) who can provide “real-life” advice based on your unique circumstances.
*Cannot use this type of plan if employer has more than 100 employees who earned at least $5,000.
