In January 2020, we discussed current trends in retirement planning for your small business. As a refresher, we touched on subjects like The SECURE Act, Individual Retirement Accounts (IRAs), Multiple Employer Plans (MEPs), and more. While we dove into many aspects of retirement benefits, we wanted to expand further on the topic of 401(k)s.

Basics of a 401(k).

A 401(k) is a qualified retirement savings plan that permits your employees to contribute a percentage of their income to individual accounts.

Some details that apply are the following:

  • Elective salary deferrals are excluded from the employee’s taxable income (except for designated Roth deferrals).
  • Employers can contribute to employees’ accounts.
  • Distributions, including earnings, are includible in taxable income at retirement (except for qualified distributions of designated Roth accounts).”

For more information regarding the details on 401(k) plans, see the IRS’ 401(k) Resource Guide.

Types of 401(k) plans.

The IRS lists three types of 401(k) plans: Traditional 401(k) plans, safe harbor 401(k) plans, and SIMPLE 401(k) plans. It is important for you as an employer to understand the different rules that apply to each, in order that the plan is administered in accordance with those rules.

Traditional 401(k) Plans

With a traditional 401(k) plan, employees that are eligible to participate in the plan can make pre-tax elective deferrals through payroll deductions. Elective deferrals are amounts contributed by the employer at the employee's election to a plan and excluded from the employee's gross income unless they are designated Roth contributions.

Rules relating to the traditional 401(k) plans require contributions made under the plan to meet specific requirements for non-discrimination. To ensure the program satisfies these criteria, you must perform Actual Deferral Percentage (ADP) and Actual Contribution Percentage (ACP) tests, to verify that deferred wages and employer matching contributions do not discriminate in favor of employees who are highly compensated.

Safe Harbor 401(k) Plans

A safe harbor 401(k) plan is similar to a traditional 401(k) plan with a few differences. These differences include:

  • They must provide for employer contributions that are fully vested when made.
  • They are not subject to the complex annual nondiscrimination tests that apply to traditional 401(k) plans.
  • They may include employer matching contributions, limited to employees who defer, or employer contributions made on behalf of all eligible employees, regardless of whether they make elective deferrals.

However, both traditional and safe harbor plans are intended for employers of any size and can be combined with other retirement plans.

Rules associated with the safe harbor 401(k) plans rely on the plan sponsor complying with notice rules when making mid-year changes. If you are a plan sponsor, Notice 2016-16 may help to ensure you are compliant with this type of 401(k).

SIMPLE 401(k) Plans

For the benefit of small businesses, the SIMPLE 401(k) plan provides a cost-efficient way of offering retirement benefits to your employees. The following are a few characteristics of this plan:

  • The plan is not subject to the annual nondiscrimination tests that apply to traditional 401(k) plans.
  • Under this plan, the employer is required to make employer contributions that are fully vested.
  • The plan is available to employers with 100 or fewer employees who received at least $5,000 in compensation from the employer for the preceding calendar year.

Employees eligible to enroll in a SIMPLE 401(k) program may not make any contributions or benefit accruals under any other employer plan.

For more information on traditional, safe harbor and SIMPLE 401(k) plans, see Publication 4222, 401(k) Plans for Small Businesses (PDF).

Which retirement plan is best for your business?

A retirement plan is an offering that you can add as part of your overall benefit package for your employees. 401(k) plans allow higher contribution limits and are generally the most popular retirement account. Understanding the different types of 401(k) plans available may make it easier when deciding what you want to implement for your business.


Want to learn more about retirement trends? PrimePay's 2020 monthly webinar series strives to educate you on trending topics that can impact your business. Click here to watch a recording on our webinar titled "PrimePay's Guide to Trends in Retirement".

Offer retirement, retain employees.

PrimePay has a passion for retirement plans. We offer retirement plan solutions that can be as low as $25 a month. We have a vast offering and it is customized to fit every employer’s needs.

PrimePay’s Retirement Plan Services include:

  • Personal Design & Implementation of the Plan
  • Open Enrollment Support
  • Recordkeeping and Compliance Testing
  • Signature-ready Form 5500 for Year-end Reporting
  • Daily Processing & Movements of Contributions
  • Fiduciary Services
  • Mutual Fund Monitoring & Reporting

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Disclaimer: Please note that this is not all-inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding the specific application of the information to your own plan.