401(k) Plans Employers Should Consider for Long-Term Savings and Employee Retention

Whether you’re running a giant corporation, a midsize company, or a one-person show, you can create a 401(k) plan. This article covers the different types of plans and the basics of what you need to know to start one.

There are several different types of 401(k) plans available to employers:

• Traditional 401(k) plans

• Safe harbor 401(k) plans

• SIMPLE 401(k) plans

• Roth 401(k) plans

• Solo 401(k) plans* (not for employees)

Most retirement plans can be combined with other plans. For example, employees can have both traditional and Roth 401(k) plans.

Each type of 401(k) option come with tax benefits to the account holder. Some 401(k) plan contributions are pre-tax while others are post-tax.

The right types of plans can vary in terms of employee contribution limits and employer contribution requirements. If you contribute to a 401(k) plan as an employer, set rules for contributions, such as a waiting period (employees must work for you for six months before you begin contributing). Also you may limit the amount you contribute (you match 50% of the employee’s contribution, up to 6%).

Compare each 401(k) option before making a decision on which route to go for your company.

Quick Reference Guide: 401(k) Types

Traditional 401(k)

A traditional 401(k) is an employer-sponsored plan that gives employees a choice of investment options. Employee contributions to a 401(k) plan and any earnings from the investments are tax-deferred. You pay the taxes on contributions and earnings when the savings are withdrawn.

Safe Harbor 401(k)

A safe harbor 401(k) plan provides all eligible plan participants with an employer contribution. In exchange, safe harbor plans allow businesses to avoid annual IRS nondiscrimination testing. Any 401(k) plan can be designed to include a safe harbor contribution.

SIMPLE 401(k)

Under a SIMPLE 401(k) plan, an employee can elect to defer some compensation. But unlike a regular 401(k) plan, you the employer must make either: a matching contribution up to 3% of each employee’s pay, or a non-elective contribution of 2% of each eligible employee’s pay. Ther are some SIMPLE specific rules that you must also consider if you are thinking about this.

Roth 401(k)

A Roth 401(k) is just like a the Traditional 401(k) except for a few key provisions.    Unlike traditional 401(k) contributions, your Roth 401(k) contributions are made on a post-tax basis or put another way,  they are included in your taxable income at the time they are made. Since the contributions are made on a post-tax basis,  you generally won’t owe federal income taxes when it’s time to make withdrawals. You should consulate a tax advisor for more specific information.

Solo 401(k)

The big draw of a solo 401(k) is the high contribution limits. To start, you make contributions as both “employee” and “employer.” As an employee you can contribute up to $22,500 in 2023, or up to $30,000, if you’re 50 or older. As an employer, you can also contribute up to 25% of your net adjusted self-employed income. So, for 2023 you can contribute up to $66,000 or $73,500 if you are 50 or older.

We hope that we have taken some of the mystery out of 401(k) plans. There is a plan out there that is the best for your situation that will help you and your employees to save for retirement.

*Looking for Employee Retirement Plans for your company? If you would like more information to help you choose the one that’s right for you, contact Elevation Investment Consulting today for a complimentary assessment of your situation.