Simplified 401(k) Options for Small Business Owners
Small business owners often hesitate to adopt 401(k) plans due to high costs and complex testing requirements. Fortunately, lawmakers have introduced simplified alternatives to make retirement benefits more accessible. These options include:
- Safe Harbor 401(k) Plan
- Qualified Automatic Contribution Arrangement (QACA)
- Starter 401(k) Plan
Safe Harbor 401(k) Plan
Traditional 401(k) plans do not require employer contributions, but they must pass annual compliance testing. Safe harbor plans simplify compliance by requiring fully vested employer contributions.
Employer Contribution Options:
- Nonelective Contribution: At least 3% of pay to all eligible employees, even if they don’t contribute.
- Basic Match:
- 100% match on the first 3% of pay.
- 50% match on contributions from 3% to 5% of pay.
- Enhanced Match: Must be at least as generous as the basic match.
Election Changes
- Decide as late as 30 days before year-end to use the 3% nonelective safe harbor.
- Amend the plan by year-end of the following year to use a 4% nonelective safe harbor.
Employee Contribution Limits
Employees can contribute up to $23,500 in 2025 (plus $7,500 for those 50+).
Qualified Automatic Contribution Arrangement (QACA)
A QACA is a safe harbor 401(k) with automatic enrollment, helping boost employee participation.
Key Features:
- Employees are automatically enrolled at a minimum 3% contribution, increasing 1% per year until reaching 6% (up to 15%).
- Employees can opt-out within 90 days and receive a refund.
- Employers must contribute:
- 3% of pay for all eligible employees, OR
- 100% match on the first 1% of pay and 50% match on the next 5%.
- Unlike standard safe harbor plans, QACAs may include a two-year vesting period.
Additionally, selecting qualified default investments can protect employers from fiduciary liability.
Starter 401(k) Plan
For businesses without an existing retirement plan, the Starter 401(k) offers a low-cost, easy-to-administer option.
Plan Highlights:
- Employee-only contributions (no employer match required).
- Auto-enrollment required (3%–15% of pay).
- Contribution limits:
- $6,000 in 2025 ($7,000 for employees 50+).
By offering these simplified 401(k) plans, small businesses can provide valuable retirement benefits while reducing administrative burdens. Choosing the right plan depends on your business goals and financial flexibility.
Would you like help determining which 401(k) plan is best for your business? Contact us today!
Safe Harbor 401(k) |
QACA | Starter 401(k) | |
|---|---|---|---|
| Which employers can adopt? | All nongovernmental employers | All nongovernmental employers | All nongovernmental employers that do not currently sponsor a plan |
| Employee elective contribution limit (2025) | Lesser of $23,500 or 100% of compensation; additional $7,500 catch-up if age 50 or older | Lesser of $23,500 or 100% of compensation; additional $7,500 catch-up if age 50 or older | Lesser of $6,000 or 100% of compensation; additional $1,000 catch-up if age 50 or older |
| Required employer contribution (compensation limited to $345,000 in 2024) |
·Dollar-for-dollar match up to 3% of compensation, 50% match above 3% to 5% (enhanced match also available) OR At least 3% of compensation to each eligible employee ·100% vested |
·Dollar-for-dollar match up to 1% of compensation, 50% match above 1% to 6% (enhanced match also available) OR At least 3% of compensation to each eligible employee ·100% vested after 2 years |
Employer contributions not permitted |
| Discrimination testing | Exempt from ADP test; exempt from ACP test if you make the safe harbor required contribution, don't match contributions over 6% of pay, and limit discretionary match to 4% of pay | Exempt from ADP test; exempt from ACP test if you make the safe harbor required contribution, don't match contributions over 6% of pay, and limit discretionary match to 4% of pay | Exempt |
| Top-heavy testing | Exempt if employer contribution limited to safe harbor required contribution; otherwise required | Exempt if employer contribution limited to safe harbor required contribution; otherwise required | Exempt |
| Additional employer contributions permitted? | Yes (discrimination testing may be required); generally 3-year cliff or 6-year graded vesting | Yes (discrimination testing may be required); generally 3-year cliff or 6-year graded vesting | Employer contributions not permitted |
