Different Types of 401(k) Plans
The different variations of plan types can be confusing: from traditional, Roth, and solo 401(k)s to SEP and simple IRAs, we’ll break down the specifics to help you decide which might be best for you.
Safe Harbor Plans
A safe harbor 401(k) plan is a type of tax-deductible plan that ensures all employees at a company have some set of minimum contributions made to their individual 401(k)s, regardless of their title, compensation, or length of service.
One major perk of this particular plan is that it also helps companies pass IRS non-discrimination testing – one of the checks that the IRS puts on 401(k) plans to make sure they’re equitable to all employees. Ultimately, it’s a nice thing to do to help employees save more money in their retirement funds, and also reduces administrative overhead you’d have to take on.
May 23, 2020
Profit Sharing Plans
While not technically a 401(k) plan, a profit sharing plan is a defined contribution plan in which the employer is granted responsibility for determining when and how much the company contributes to the plan. The amount allocated is usually based on the employee’s salary level or level within the organization.
Unlike a 401(k) plan, a profit sharing plan does not allow employees to make contributions: the plan only accepts contributions from the employer. Companies aren’t required to contribute a set amount; instead, the amount is based on their discretion. Many business owners use profit sharing as a great way to save on corporate taxes as well as to reward and motivate employees.
A solo 401(k) isn’t for everyone, but can be a great option if you’re a sole proprietor. If you see yourself expanding your business to hire other employees, and are not simply an early stage company, you can qualify for a solo 401(k).
The major benefit of this type of plan is that it does not apply to your spouse: that is, your spouse is allowed to participate in the plan. Between the two of you, the limit for contributions is $18,500 each, plus 25% of your net income, not to exceed $53,000. That means you can save up to $106,000 per year total!
401(k) vs 403(b)
You can dive into a lot of details about the differences between a 401(k) and a 403(b), but in essence it’s another type of retirement plan that can only be offered by certain types of tax-exempt organizations incluidng:
- An entity created under the section 501(c)(3) of the Internal Revenue Code.
- Public school systems
- Cooperative hospital service organizations
- Uniformed Services University of the Health Sciences (USUHS)
- Public school systems organized by Native American tribal governments
- Certain ministers
- Any 501(c)(3) institution which might include a not-for profit university, religious organization or social service agency
While 403(b)s typically have easier compliance testing requirements and some variances in the types of funds that are allowed, the general concept is the same: it allows for employees to save for retirement.
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