Small businesses today have many types of retirement plan options available to them.  Businesses can choose:

1)  Business 401k plan (sometimes referred to as a Traditional 401k plan).

2)  Simple 401k plan (sometimes called the small business 401k plan).

3)  Simple IRA plan.

The IRS considers all 3 of those retirement plans qualified retirement plans.  And even though the are all qualified retirement plans, different rules apply to each.  And each one may offer some similar features but also offer slightly different features.  We will review the differences.

In some cases, a business 401k plan or Traditional 401k plan may be too costly for a small business.     A small business may actually save money in fees by offering a small business 401k plan or Simple 401k plan or Simple IRA to their employees.

Each type of qualified retirement plan comes with different advantages and disadvantages for the business owner.   Let’s review those.

Different 401ks Offer Different Features:

Traditional 401k Plan:

Advantages for the business:

  • The business can maintain another qualified retirement plan, such as a profit-sharing or SEP.
  • This other qualified plan can run concurrently with the Traditional 401k plan.
  • Employers have the discretion to match or not.
  • Employers are not required to match.

Disadvantages for the business:

  • There are testing requirements set up by the IRS.
  • Non-discriminatory and top-heavy are two tests required by the IRS.
  • An outside independent firm must be hired to perform the testing.
  • This is an added cost to the business.

Simple 401k Plan:

Advantages for the business:

  • The plan is not subject to IRS discrimination testing.
  • Lower administration fees than a traditional 401k plan.

Disadvantages for the business:

  • The deadline to start a Simple 401k plan is January 1st to October 1st.
  • The employer cannot maintain another qualified retirement plan.
  • The employer can only offer the Simple 401k plan if the business employs less than 100 employees.
  • The employer is required to make matching contributions.

Simple IRA Plan:

Advantages for the business owner:

  • There are no testing requirements.
  • Easy and inexpensive to set up and administer.

Disadvantages for the business owner:

  • Employer can only offer the Simple IRA Plan if the business employees less than 100 employees.
  • Employers must match.
  • The matching can be dollar for dollar up to 3% of employee’s compensation up to the employee’s contribution amount.
  • Or the employer can match 2% of compensation to all employees regardless of whether they made a contribution or not.

Different qualified retirement plans meet different needs of the business owner and offer different features for the employee.   Review the advantages and disadvantages of each before deciding on which retirement plan to implement in your business.