In Part 2, 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 quite a few and we provide practical pointers to help you understand why a business might choose one plan over the other. other.
401(k) – This is the most common retirement plan offered today. 401(k) plans allow employees and owners to defer up to $23,500 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 does not require EMPLOYER CONTRIBUTIONS.
SIMPLE IRA* – This plan is technically not a 401(k) plan, but it is similar in that it allows employees to defer from their compensation on a pre-tax or after-tax basis, but only up to $16,500 ($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 & 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 at Least Age 50 | Required Employer Contributions | Plan Document Required | Government Form 5500 Filing Required |
|---|---|---|---|---|---|
| 401(k) | $23,500 | $7,500 * | NO | YES | YES |
| SIMPLE IRA | $16,500 ** | $3,500 ** | YES | Can use IRS Forms | NO |
| SIMPLE 401(k) | $16,500 ** | $3,500 ** | YES | YES | YES |
| SAFE HARBOR 401(k) | $23,500 | $7,500 * | YES | YES | YES |
*$11,250 for employees age 60-63 during a calendar year.
**Deferral limits are increased by 10% if employer has 25 or fewer employees, or elects to make an additional 1% required contribution. Also, if employees is age 60-63, additional deferral limit increases to $5,250.
We provide more details on each “Plan Type” in our “Keeping It Short & Simple” series. 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.
