Offering a tax-advantaged retirement plan is one way to help attract and retain quality employees. The 401(k) is a popular option, but employers have more than one variety to choose from:
Traditional. Employees contribute on a pretax basis, with the employer matching all or a percentage of their contributions if it so chooses. Traditional 401(k)s are subject to rigorous testing requirements to ensure the plan is offered equitably to all employees.
Roth. Employees contribute after-tax dollars but take tax-free withdrawals (subject to certain limitations). Other rules apply, including that employer contributions can go into only traditional 401(k) accounts, not Roth 401(k)s.
Safe Harbor. Employers must make certain contributions, but owners and highly compensated employees can maximize contributions without worrying about the strict testing rules of traditional 401(k)s. Required employer contributions must vest immediately.
Savings Incentive Match Plan for Employees (SIMPLE). As with a Safe Harbor 401(k), the employer must make certain, fully vested contributions. But there’s no rigorous testing, though an IRS filing is required. So what’s the difference? Participant deferrals and required employer contributions are lower.
We can provide more details on each 401(k) and insights into their pluses and minuses. Contact us to learn more.