Retirement Plan Options

There are many types of retirement plans out there, but 401(k) plans are the most popular retirement plans in American. The appeal of these plans may come from the fact that they offers advantages like allowing more contributions that an IRA. Rev. Ruling 81-1114 sets out the timing rules for establishing a 401k, while section 401(a) sets forth the rules governing 401k plans. Additionally, these plans come in many different forms. Employees can have a traditional 401k plan, a safe harbor 401k plan, or a SIMPLE 401k plan and employees have the option of a ROTH provision.

Traditional 401(k) Plans: An employee can elect to defer up to $16,500 of his or her salary. If the employer contributes to the plan, the contribution can be subjected to a vesting schedule. Plan failures are not known until the end of the year, however, so many companies opt for safe harbor 401K plans.

Safe Harbor 401(k) Plans: These plans must provide for fully vested employer contributions that typically consist of 3% of pay contribution. Elections for these plans must take place by October 1.

SIMPLE 401(k) Plans: This plan is not subject to nondiscrimination testing, and the plan must have less than 100 employees who receive at least $5,000 in compensation.  

For more information on 401(k) plans, see Nick Paleveda, Cross Tested Retirement Plans: The Future of Tax and Asset Protection Planning for Small Business, Wealth Strategies Journal, Dec. 13, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.