Common Types of 401(k)s Your Business Can Offer
Businesses should consider their own circumstances before making a decision on what 401(k) top implement.
Businesses should consider their own circumstances before making a decision on what 401(k) top implement.
401(k)s are popular retirement savings plans for employers to offer to their employees. With various types of 401(k)s available, businesses have a lot to consider when choosing the right plan for their staff and their company. To find the best fit for your business, compare options based on set variables — including company size and available resources — and priorities, such as your preferred flexibility.
Traditional 401(k)s
Guided by the rules of the IRS and Department of Labor (DOL), Traditional 401(k) plans can be more administratively demanding than other plans. However, they provide employers with the most flexibility regarding many plan features — eligibility, employee contributions (pre-tax and Roth), employer contributions, types and timing of withdrawals, choice of investments, etc.
What are the benefits of a Traditional 401(k) plan for employees?
401(k)s are popular with employees because of the potential for generous employer match contributions, tax advantages and high annual contribution limits. Companies that offer them, therefore, are more attractive to employees.
What administrative duties come with a Traditional 401(k) plan?
While not overwhelming — although the number of participating employees is a factor — managing a 401(k) requires regular attention to remain compliant. There are federal regulatory standards, among other rules, to monitor, as well as record-keeping, filings and disclosures to maintain.
Safe Harbor 401(k)
Safe Harbor 401(k)s provide much of the same flexibility as Traditional 401(k)s but require company contributions. In exchange for the employer contributing to employees’ Safe Harbor plans, the business is exempt from certain regulatory testing, enabling business owners to maximize their contributions and save time, funds and administration.
Why choose a Safe Harbor 401(k) over other 401(k) types?
The reduced regulatory requirements and, therefore, time spent on administration are among the primary advantages for a Safe Harbor 401(k), but they also can be enticing to employees. Mandated employer contributions and immediate vesting make the plan more tangible for employees, rather than savings that may not show their full benefit for years.
SIMPLE 401(k)
SIMPLE (“Savings Incentive Match Plan for Employees”) 401(k)s are available for businesses with 100 or fewer employees. As a “simplified” version of the Traditional 401(k), this plan has fewer testing requirements to limit the resources small businesses need to invest in plan maintenance. The trade is that SIMPLE plans also offer somewhat less flexibility: contribution limits are lower and employer contributions are required, either with a three percent match or a standard two percent for each eligible employee.
Solo 401(k)
Also called an Individual 401(k) or One Participant 401(k), this plan is designed specifically for small businesses whose only employees are the owner (and spouse). With this plan, you can make contributions as both the employer and the employee.
Choosing the right 401(k) plan is just the beginning—implementing it effectively is where your business truly begins to see the benefits. Don’t navigate these waters alone! Check out First National Bank’s guide to starting a 401(k).
