A Guide to the Different Types of 401(k) Plans
John F. Dennehy Jr., CPA, PC

A Guide to the Different Types of 401(k) Plans

You want the best employees for your small business. To attract — and keep — them, you need a full lineup of enticing benefits. A robust retirement plan should be part of your compensation package.

If you’ve never offered an employee retirement plan before, you may be unsure where to begin. The first step is to learn about the types of 401 k plans so that you have a better idea of what’s out there. The second step is to contact a professional CPA firm to help you get started.

401(k) Basics for Small Business Owners

Before you delve into the specific types of 401 k plans, it makes sense to learn about these plans in general.

401(k) plans allow employees to save for retirement. Check out these fast facts about 401(k) plans:

  • Contributions go straight from an employee’s paycheck into the investment account.
  • Most plans allow employees to make tax-free contributions.
  • Employees don’t pay taxes on the investment as it grows.
  • Employers can choose to match their employees’ contributions.
  • Employees usually have an assortment of options for where to invest the funds.

You can learn more about 401(k) plans in this video:

Types of 401(k) Plans

Different companies choose to offer different types of 401 k plans. Familiarizing yourself with the various options can help you figure out which is the best for your small business.


As the name suggests, traditional 401(k) plans are the bedrock. All other 401(k) plans offer some variation on this basic approach.

With traditional 401(k) plans, the money that goes in isn’t taxed. Neither is the investment taxed as it's growing. In the end, though, taxes must be paid on the withdrawals.

The IRS sets annual limits for how much people can contribute to a 401(k). Employer contributions can help people save even more.

Some workplaces give 50 cents for every dollar contributed. Others do dollar-for-dollar matches. You can set rules about how long people must work at your company before the employer contributions become fully theirs.

Safe Harbor

When you offer 401(k) plans, you will have to meet IRS standards for fair contributions. Your matches can’t disproportionately benefit the people at the very top of your company while leaving other employees in the dust. Nondiscrimination testing is the method used to figure out whether you’re going about this properly.

If you don’t want to deal with nondiscrimination testing, then you have another option: safe harbor 401(k) plans. There are a few different types, but the basic idea is that you must contribute a set percentage of each employee’s salary.

Those contributions will be immediately vested. That means that the employee doesn’t have to work for you for a certain length of time before that money will be rightfully theirs.


As a small business, you might be a great fit for a SIMPLE 401(k) plan. That stands for “Savings Incentive Match Plan for Employees.”

Not all businesses are eligible for this type of 401(k). To qualify, your company can’t have more than 99 employees.

SIMPLE plans also have more limits in place than traditional plans. Employees have a lower annual contribution limit, and there’s also a fairly low limit on employer contributions.

But if you’re just dipping your foot into 401(k) waters for the first time, SIMPLE plans could be the introduction that you need.


With most 401(k) plans, the tax advantages come at the beginning. Contributions don’t count toward taxable income. Lower annual taxes make it easier for many employees to set aside funds for retirement. Even still, some people prefer a different approach.

Roth 401(k) contributions are made post-tax. In other words, employees have to pay taxes on the money that they put in. That pays off in the end because withdrawals in retirement can be taken tax-free.

You could choose to offer both traditional and Roth 401(k) plans to your employees.


What if you’re a self-employed worker or a sole proprietor? Are you out of luck when it comes to 401(k) plans? No! Solo 401(k) plans are designed for people like you.

With this type of plan, you won’t get an employer match. On the other hand, you’ll have the benefit of a much higher contribution limit than other 401(k) types provide. If you have the money to spare, you can fund your individual 401(k) quite well each year.

There are options to consider when you set up a solo 401(k). You can use a traditional taxation structure, or you can establish your one-contributor 401(k) as a Roth plan.

How to Get Started with 401(k) Plans

By learning the types of 401 k plans, you’ve only begun to scratch the surface. There's still a lot to know and manage about offering employee retirement benefits.

Other things to think about include tax implications and annual audits. You’ll also need to figure out how to fund your plan and how to keep track of the contributions that your team members make.

A professional CPA firm can take the burden of 401(k) setup and maintenance off your shoulders. For the best experience for both you and the employees who will benefit, choose to outsource this job to the pros.

Turn to John F. Dennehy Jr., CPA

When you’re ready to explore 401(k) plans for your small business, count on the team at John F. Dennehy Jr., CPA. You and your employees will be in good hands with our experts. We can help you select from among the types of 401 k plans. Our team can also get your plan set up and manage the details along the way.

About the Author John F. Dennehy Jr., CPA, PC

We at John F. Dennehy CPA are a team of certified public accountants who service clients throughout Long Island. The services that we provide are comprehensive, and we can resolve multiple accounting needs for a client.

Popular posts