Offering a retirement plan to your employees can provide them with a substantial savings opportunity. It also can be a significant tax savings strategy for your business and a way to create a robust benefits package for attracting and retaining skilled talent.
But it can be tough to choose the right plan. Where do you start? Which plan is best for your business and your employees?
Here’s an overview of five common retirement plans and how they compare:
Traditional 401(k) | Safe Harbor 401(k) | 403(b) | SEP IRA | Simple IRA
1. Traditional 401(k)
What’s the benefit of choosing a traditional 401(k) plan? It allows employees to make greater salary deferral contributions compared to other plans.
Employers can offer traditional 401(k) plans if they have one or more employees, including those who are self-employed. Employers must offer this plan to all employees who are at least 21 years old and worked at least 1,000 hours in a previous year. If you offer a traditional 401(k), you’re required to annually file Form 5500 and provide a summary report to participants.
In a traditional 401(k), employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.
Employers may provide other retirement plans in addition to a traditional 401(k) plan.
Tax advantages: Employer contributions are deductible on the employer’s federal income tax return. Pre–tax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.
Note: ADP/ACP discrimination testing is required.
| Year | Annual Contribution Limits | Employee Contributions |
| 2021 | $58,000 or 100% of each employee’s compensation – whichever is less | $19,500 |
| 2020 | $57,000 or 100% of each employee’s compensation – whichever is less | $19,500 |
| Notes | Employers can make contributions on behalf of all participants, make contributions based on employees’ elective deferrals, or both. | Employees can choose to make pre-tax deferrals through payroll deductions. Catch-up contributions are allowed. |
2. Safe Harbor 401(k)
A highlight of the safe harbor 401(k) plan is it doesn’t require ADP/ACP discrimination testing.
Employers can offer safe harbor 401(k)s if they have one or more employees, including those who are self-employed. Employers must offer a safe harbor 401(k) to all employees who are at least 21 years old and worked at least 1,000 hours in a previous year.
Employee salary deferrals and required employer contributions are immediately 100% vested. Any additional employer contributions may vest over time according to plan terms.
You may provide other retirement plans in addition to this plan.
Tax advantages: Employer contributions are deductible on the employer’s federal income tax return. Pre-tax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.
If you offer a safe harbor 401(k), you’re required to annually file Form 5500 and provide a summary report to participants.
| Year | Annual Contribution Limits | Employee Contributions |
| 2021 | $58,000 or 100% of each employee’s compensation – whichever is less | $19,500 |
| 2020 | $57,000 or 100% of each employee’s compensation – whichever is less | $19,500 |
| Notes | Employers must contribute either (1) 3% of all eligible participants’ compensation or (2) match 100% of employee deferrals up to 3% of their compensation plus match 50% of employee deferrals up to 3-5% of their compensation. | Employees can elect to make pre-tax deferrals through payroll deductions. Catch-up contributions are allowed. |
3. 403(b)
What’s the benefit of choosing a 403(b) plan? There’s no discrimination testing on employee salary deferral contributions. Public schools, colleges or universities, churches, and certain tax-exempt nonprofit organizations can offer 403(b) plans.
Employers must offer 403(b) plans to all employees working 20 hours or more per week. Employers can require employees to satisfy certain age and service requirements to be eligible for employer contributions.
Employee salary deferrals are immediately 100% vested. Employer contributions may vest over time according to plan terms.
In addition to a 403(b) plan, you may offer another 401(a) or 457 qualified plan.
Tax advantages: Pre-tax elective deferrals and investment gains aren’t taxed. They enjoy tax deferral until distribution.
If you offer a 403(b) plan to your employees, you must annually file Form 5500 and provide a summary report to participants.
| Year | Annual Contribution Limits | Employee Contributions |
| 2021 | $58,000 or 100% of each employee’s compensation – whichever is less | $19,500 |
| 2020 | $57,000 or 100% of each employee’s compensation – whichever is less | $19,500 |
| Notes | Employers can make contributions on behalf of all participants, make contributions based on employees’ elective deferrals, or do both. | Employees can elect to make pre-tax deferrals through payroll deductions. Catch-up contributions are allowed. |
4. SEP IRA
What’s a great feature of SEP IRA plans? There are no startup or operating costs. Any employer with one or more employees –including self-employed – can offer a SEP IRA.
Employers must offer SEP IRA plans to all employees who are at least 21 years old, employed for three of the last five years, and earned at least $650 in 2021.
Tax advantages: Employer contributions are deductible on the employer’s federal income tax return. The maximum deduction is the amount the employer contributed or 25% of its employees’ wages, whichever is less. Contributions aren’t taxed and enjoy tax deferral until distribution.
If you offer a SEP IRA plan to your employees, additional plans are allowed. However, if you used Form 5305-SEP to establish this plan, you can only offer another SEP.
| Year | Annual Contribution Limits | Employee Contributions |
| 2021 | $58,000 or 25% of each employee’s compensation – whichever is less | $0 |
| 2020 | $57,000 or 25% of each employee’s compensation – whichever is less | $0 |
| Notes | As the employer, you must contribute equally to all eligible employees. | Employees can’t contribute to the plan. |
5. Simple IRA
The highlight of a Simple IRA plan is minimal administrative paperwork and low operating and startup costs, compared to other retirement plans.
Employers can offer Simple IRA plans if they have one or more employees and if they’re self-employed. Employers must offer Simple IRAs to all employees who have earned at least $5,000 in any prior two years, and who are reasonably expected to earn at least $5,000 in the current year. All employer and employee contributions are immediately 100% vested.
Tax advantages: All employer contributions are deductible on the employer’s federal income tax return. Pre-tax elective deferrals and investment gains aren’t taxed and enjoy tax deferral until distribution.
There are no filing requirements for Simple IRAs and no additional plans allowed if employers offer this plan to participants.
| Year | Annual Contribution Limits | Employee Contributions |
| 2021 | See notes | $13,500 |
| 2020 | See notes | $13,500 |
| Notes | Employers are required to match employee contributions 100% for the first 3% of compensation. Or, you must contribute 2% of each eligible employee’s compensation. | Employees can elect to make pre-tax deferrals through payroll deductions. Catch-up contributions are allowed. |
Once you choose a plan, what’s next?
Contact a tax professional or financial institution that’s familiar with retirement plans to discuss plan options and features in more detail.Then, select a plan administrator. You can handle this internally or outsource it to a third party. A plan administrator can help with plan design and plan comparisons, perform any required compliance testing, track ineligible employees, and more!
Lastly, make sure the appropriate parties (human resources, finance/accounting, payroll) know the plan, its amendments, how to make any necessary salary deferrals, etc. Your company is ultimately responsible for complying with legal requirements, not your plan sponsor or administrator.
Originally published 7/19/2017. Updated 12/31/2020.
Have questions about which retirement plan is best for your business? Let’s talk!
