Paper Trails

Common Retirement Plans

Every American worker would like to retire with a comfortable amount of money at an early age. However, an study suggests that the complete opposite is happening. In fact, the United States is facing a retirement savings crisis. According to the study, 22% of Americans have less than $5,000 saved for retirement while 15% of nothing saved. Consequently, the average age of retirement is 66.85 years old, while retirement age is at 62 years. While many states have begun creating state run retirement programs, business have many options when it comes to employer sponsored-retirement plans. In fact, offering a retirement plan to employees is a great employee retention tool and offers businesses many tax advantages. Let’s take a high level look at some common retirement plans.

Common retirement plans

There are numerous types of retirement plan options available to businesses. Each plan has specific advantages and disadvantages and may suit one particular type of business better than another. Be sure to do research and consult with your financial advisor to pick a plan that works best for your business. Continue reading to learn the basics of the following plans:

  • Traditional 401(k)
  • Safe Harbor 401(k)
  • 403(b)
  • Defined Benefit Plan

Traditional 401(k)

Traditional 401(k) plans, along with SIMPLE IRA plans, are the most common among small businesses. For a full comparison of these two types of plans, read our article here.

Traditional 401(k)s are great for any sized company that have older employees as the IRS contributions limits for both employees under and over 50 years old are greater than most other plans. While employers are not required to match employee contributions to the plan, they may wish to do so. 401(k)s do come with greater administrative burden, paperwork requirements, and testing for businesses than some other types of plans.  For this reason, a 3(16) fiduciary is key in helping manage the plan.

There are a few advantages to a Traditional 401(k) for employees. Contributions to the account are made on a pre-tax basis, lowering their taxable income in the current year. Any earnings in this retirement plan grow tax-deferred, meaning taxes are not paid until the money is withdrawn. As previously stated, employers may match employee contributions, resulting in a larger retirement account for the employee.

Safe Harbor 401(k)

A Safe Harbor 401(k) is very similar to a Traditional 401(k). Any size employer may offer a Safe Harbor 401(k) to its’ employees. The same rules apply for the limits on which employees can participate in the plan, and the amount that employees are allowed to contribute.

The big difference between these two types of 401(k)s comes in the employer match category. For Traditional 401(k)s, employers can but are not required to match employee contributions. Safe Harbor 401(k)s do require an employer match. Employers either provide:

  • Basic match: the employer matches 100% of the first 3% of each employee’s contribution and 50% of the next 2%.
  • Non-Elective: employees do not contribute and the employer contributes 3% of the employee salary.

The advantage for the employer is that since they match the employee contribution, the federal government gives a pass on certain compliance testing. With less testing comes less administrative burden for a business.


403(b) retirement plans are specific to certain types of businesses. Public education institutions, churches, and nonprofit groups under IRC 501(c)3 are eligible for a 403(b) plan. Qualifying employees of these types of plans are designated by employer, but the employer must follow certain Federal requirements. Contributions limits for 403(b) plans are the same as 401(k) plans, but do offer an additional catch-up amount for those with 15 or more years of service.

The employee advantages of a 403(b) are similar to a 401(k) in that contributions are made on a pre-tax basis and money in the plan grows tax-deferred. Employees will pay taxes once the money is withdrawn, but in most cases, they will be in a lower tax bracket in retirement.

Defined Benefit Plan

A defined benefit plan, commonly known as a pension plan, is an employer sponsored program where employees receive a fixed, pre-set benefit when they retire. The benefits are computed using a formula that considers several factors, such as length of employment and salary history. A defined benefit plan is a type of deferred compensation.

In contrast to contributions plans, a defined benefit plan puts the responsibility of the planning and investment risk on the employer. Overall, defined benefit plans tend to be more expensive and complex to operate.


A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a great retirement plan for small businesses. Only businesses with under 100 employees are eligible to operate a SIMPLE IRA. The administrative burden for employers is greatly reduced with a SIMPLE IRA rather than with a 401(k). These plans do not carry certain testing or reporting requirements, making them appealing to small businesses.

Employers are required to match employee contributions with this type of plan. Employers can either:

  • provide 2% of compensation to all eligible employees
  • match 100% of the deferral amount up to 3% of compensation

Unlike 401(k) plans, there is no vesting schedule for SIMPLE IRA plans, meaning employees receive any employer contributions immediately. As with other plans, employers are eligible for certain tax credits when offering a SIMPLE IRA.

Employees can contribute up to $14,000 in 2022, and an additional $3,000 if over the age of 50. These contributions grow tax-deferred for employees and can provide significant tax savings in the future. One additional downside of a SIMPLE IRA for employees is that they can not take a loan against their account, like 401(k)s allow, and must pay early withdrawal penalties of 10%.


The last common retirement plan we will cover is a SEP (Simplified Employee Pension) IRA. While a SEP IRA has many similarities to a SIMPLE IRA, such as immediate vesting schedules, lower administrative requirements and tax-deferred growth, there are many differences as well.

SEP IRAs only allow for employer contributions. These contributions are deductible and aren’t required every year. Employers may contribute up to 25% of an employee’s pay annually to the account, up to a total contribution of $61,000 for 2022. This contribution percentage must be equal for all eligible employees. It is important to note that the employer must make the same percentage contribution to employees as they do for themselves.

Employees can not defer their salary to contribute to their SEP IRA accounts. While there are no catch-up options for employees over 50 years of age, the higher contribution limits may offset this problem. As with a SIMPLE IRA, employees will be hit with an early withdrawal penalty of 10% for withdrawing funds prior to age 59.5.