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What's keeping you from starting your 401(k) plan?

Nov 06, 2015

Business owners have many decisions to make every day. Some are routine--important for the day or maybe the week’s production. Some decisions will impact the business for years to come. Choosing the right retirement plan for your business would fall into the later category. Retirement savings is necessary in today’s world and some of the questions you have to ask yourself and complicated.

Who am I trying to benefit with a retirement program? Employees, Owners, myself, all of these? What kind of benefits do I want for each of these groups? What kind of administration costs do I want to pay? What about costs for participants and investments?

Two of the most common retirement plans available to small employers are Safe Harbor 401(k) plans and SIMPLE plans. We explain some of the features of each to make a comparison between these two different plans to help you evaluate which type of plan might be best for you and your business.

Safe Harbor SH401(k)

A SH401(k) plan generally offers more flexibility to small employers than a SIMPLE plan. For example, different options are usually available for automatic enrollments, vesting periods or schedules, loan options, and eligibility criteria. Employers are also not necessarily required to make contributions and total tax deferred contributions for participants can be up to $18,000 for 2015. Additional employer contributions through profit sharing and money purchase plans is also an option.

SH401(k) plans are subject to more rigorous testing and reporting obligations. This burden can add to the administration and recordkeeping costs of the plan and include additional fiduciary responsibilities for the employer or plan trustee. Lastly, SH401(k) plans generally offer a varied menu of investment options for participants. Having additional investment options can be a significant factor in deciding what type of plan fits best for them and their business.

SIMPLE IRA Plans

SIMPLE plans are typically NO Cost for administration vs. SH401(k) plans but don’t offer the same investment and contribution advantages. SIMPLE plans differ from SH401(k) plans in several respects: lower contribution limits for employees and employers, required employer contributions, no annual discrimination testing, and very limited vesting and eligibility criteria options. Also, loans are not allowed with SIMPLE 401(k) plans.

SIMPLE IRA, are not compatible with any other retirement program such as profit-sharing or money purchase plans. This stipulation can further limit contribution strategies for retirement plans.

Plan Comparison for 2015 & 2016

Feature Safe Harbor 401(k) SIMPLE IRA
Maximum Employee Deferral (For pretax and Roth) $18,000 $12,500
Roth 401(k) Contribution Option
Catch-up Contributions (For participants 50 or Older) $6,000 $3,000
Employer Match Contribution 3% non-elective, 4% Match, 3.5% QACA 100% up to 3% match; or 2% non-elective contribution
Vesting Immediate for Non-Elective and Match, 2 years for QACA Immediate
Loans
ADP/ACP Testing
Top-Heavy Testing
Investment Providers Choice of Many Usually Single Provider
Allows Profit Sharing Contribution including New Comparability
* Up to 5 years Vesting

For those employers considering converting their SIMPLE plans to a Safe Harbor 401(k) for the 2016 tax year the deadline is January 1, 2016. You cannot have a Simple Plan in the same year as another plan.

Professional Financial Specialists, Inc. (PFSI) is a full service insurance and financial brokerage. Regan Turner, founder and principal at PFSI, has 25 years of Financial and Investment Background. He has B.S. in Finance from CU Boulder with emphasis in Income Tax Accounting and has earned the CFP® , Certified Financial Planner ™ designation. PFSI has been providing 401(k) solutions for more than 20 years. We assist in plan design and plan optimization for owners and key employees. We have integrated platforms that provide a turnkey full service solution including Payroll, Funding, Fiduciary, education, investment analysis, and administrator monitoring.