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401(k) plans are the most popular type of workplace retirement plan in our country. An estimated 53 million U.S. workers participate in 401(k) plans that have total assets of about $4 trillion.

However, SIMPLE IRAs, and SEP IRAs are also popular with for-profit businesses – the typical 401(k) sponsor. These IRA-based alternatives can’t match the high contribution limits or the features breadth of a 401(k) plan, but they can be cheaper and easier to administer.

If you are in the market for a new workplace retirement plan, I recommend you evaluate all three options before you decide to sponsor a 401(k) plan. One of the IRA-based alternatives can be a better choice for your business if your employees won’t utilize a 401(k) plan’s superior benefits.

To help choose the right plan for your business, you should understand their features and match them to your priorities (e.g., higher contributions or simpler administration).

401(k) plans

A 401(k) plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage. More information about these plans can be found on the IRS website.

Who can offer a 401(k) Plan? Corporations, Sub-Chapter S, Self Employed, Sole Proprietorships, Partnerships, LLCs, and Non-Profit.

Pros Cons
Most valued by highly skilled workers Administrative costs generally higher than IRA alternatives
Highest employee contribution limits - $18,000 + $6,000 catch-up for 2017 More complex ERISA compliance requirements, including annual discrimination testing (non-safe harbor plans only) and Form 5500
Highest total contribution limits - $54,000 ($60,000 including catch-up contributions) for 2017  
Employees can make pre-tax or after-tax (Roth) contributions  
Most flexible eligibility, contribution, vesting and distribution options  
Employee loans and hardship withdrawals available  

Savings Incentive Match Plans for Employees (SIMPLE IRA)

Allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.

Who can offer a SIMPLE IRA? Employers with 100 or fewer employees who earned $5,000 or more during prior calendar year (cannot maintain another retirement plan).

Pros Cons
Easy and inexpensive to set up and operate Lower employee contribution limits – $12,500 + $3,000 catch-up for 2017
Employees share responsibility for their retirement Inflexible employer contributions – employer must make either a 3% matching contribution or 2% non-elective contribution
No discrimination testing or Form 5500 required Employer contributions must be 100% immediately vested
  Employer cannot have any other retirement plan

Simplified Employee Pension Plans (SEP IRA)

A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP.

Who can offer a SEP IRA? Corporations, Sub-Chapter S, Self Employed, Sole Proprietorships, Partnerships, Non-Profit (not eligible for salary deferral).

Pros Cons
Easy to set up and operate Employee contributions are not allowed
Low administrative costs Employer must contribute equally for all eligible employees
Flexible annual contributions – good plan if cash flow is an issue  
High contribution limits – Maximum contribution is the lesser of:
- 25% of the employee's compensation, or
- $54,000 (for 2017)
 
No discrimination testing or Form 5500 required  

All three of these options offer the following benefits to your business and employees:

Business benefits

Employee benefits

  • Employee contributions can reduce current taxable income.
  • Contributions and investment gains are not taxed until distributed.
  • Contributions are easy to make through payroll deductions.
  • Compounding interest over time allows small regular contributions to grow to significant retirement savings.

For Additional Information:

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