Comparing 401(k) Plans

Contributions to SIMPLE and safe harbor 401(k) plans are immediately vested, while traditional 401(k) plans allow employers to wait years before their contributions fully vest. The traditional plan gives employees a financial incentive to stay with their current companies.

The traditional 401(k) allows employees to contribute more to their plans, and employers are allowed to contribute as much as 25 percent of the employee's income. However, because the employer is not required to contribute under the traditional plan, the employee may not receive the added benefit of a matching contribution.

With matching contributions, employees under age 50 can save as much as $17,250 a year in their 401(k). However, if employers do contribute under the traditional plan, employees under 50 who earn $225,000, the maximum allowed under 401(k) plans, can have up to $45,000 per year in personal and employer contributions to their 401(k).

The major benefit of the SIMPLE and safe harbor 401(k) plans is that employers don't have to deal with the government's often costly non-discrimination tests, and the paperwork is simpler. Companies must pay professionals for these evaluations. Your business can also offer another retirement plan even if you have a traditional or safe harbor 401(k).

Additional Factors of Small Business 401(k)Plans

Employer contributions to their employees' 401(k) plans are tax-deducible, but depending on the plan, contributions may not be required. There are also age restrictions on a 401(k): Employees must be at least 21, and the contribution for employees 50 and over is about 25 percent higher than the established limit. Employees can take 401(k) plans with them when they leave the company.

You can either let employees manage their investments in 401(k) plans or you can offer investment options. The Department of Labor advises employers to consider hiring an investment professional to manage investments or create investment options for your employees.