401(k) & Simple IRA Plans

A retirement plan worth participating in.

A good plan does two jobs: it lets the owner save aggressively, and it helps retain the employees the business can’t afford to lose. A bad plan is a compliance checkbox with expensive funds, sleepy participation, and a fiduciary risk nobody wants to talk about. The difference is design.

Plan options at a glance

• SEP-IRA. Employer-only contributions, very simple to administer. Fits solo owners and very small firms with stable headcount. The downside: contributions must be a uniform percentage of pay across all eligible employees.
• SIMPLE IRA. Employer match (or 2% nonelective) plus employee deferrals. Low admin, no testing. Good for under-50-employee firms that want some employee participation without 401(k) complexity.
• Safe Harbor 401(k). A 401(k) with a required employer contribution that bypasses most nondiscrimination testing. The standard pick when owners and highly compensated employees want to defer the maximum.
• Traditional 401(k). More flexible employer contribution choices, but subject to ADP/ACP testing. Works when the rank-and-file participates well; otherwise it forces refunds to owners.
• Solo 401(k). For owner-only businesses (and spouse). Allows both employee deferral and employer profit-sharing in one plan, with a much higher combined limit than a SEP at most income levels.

How a Safe Harbor 401(k) works

In a traditional 401(k), the IRS makes sure highly compensated employees (HCEs) aren’t deferring much more, on a percentage basis, than the rank-and-file. If the test fails, owners get refunds. A Safe Harbor plan sidesteps most of that by committing in advance to a meaningful employer contribution.

Two common safe-harbor formulas:

• Basic match. 100% on the first 3% of pay, plus 50% on the next 2%. Effective max: 4% of pay for employees who defer at least 5%.
• Nonelective. 3% of pay to every eligible employee, regardless of whether they defer.

The trade is straightforward. The company commits to a real contribution, generally vests it immediately, and in return the owners and HCEs can defer the full elective limit without worrying about testing refunds.

2026 contribution limits

Verified against the IRS 2026 announcement:

• 401(k) elective deferral: $24,500
• Age 50+ catch-up: $8,000 (so $32,500 total for age 50+)
• Ages 60-63 “super” catch-up (SECURE 2.0): $11,250 in place of the $8,000, for $35,750 total
• Total annual addition (employee + employer): $72,000 (or $80,000 with age 50+ catch-up)
• SIMPLE IRA elective deferral: $17,000 (or $18,100 for certain plans under SECURE 2.0); $5,250 catch-up for ages 60-63
• Compensation cap for plan purposes: $360,000
• Social Security wage base (relevant for integrated formulas): $184,500

One more 2026 wrinkle worth knowing: employees age 50+ who earned more than $150,000 in FICA wages in the prior year must make their catch-up contributions on a Roth basis. Plans that don’t offer Roth need to add it or restrict those catch-ups.

Real numbers: an owner earning $300k in 2026

Illustrative only, not advice for your situation:

• SIMPLE IRA path: Owner defers $17,000; employer 3% match adds $9,000. Total to owner’s account: roughly $26,000.
• Safe Harbor 401(k) + profit-sharing path: Owner defers $24,500 (or $32,500 with age 50+ catch-up). Employer adds a 3% safe-harbor nonelective ($9,000) and a profit-sharing contribution sized to fill the $72,000 annual addition cap. Total to owner’s account: up to $72,000 (or $80,000 with catch-up).

For an owner with the cash flow to fund employer contributions, the 401(k)/profit-sharing structure can shelter roughly two to three times what a SIMPLE allows. The right plan depends on headcount, payroll, and how much you’re willing to put into employees’ accounts.

Common mistakes

• Wrong plan for the headcount. Sticking with a SIMPLE long after the company outgrew it. Or running a complicated 401(k) for a four-person shop that would be fine with a SEP.
• Ignoring fiduciary duties. Once the plan exists, somebody is the fiduciary. Treating that as a paperwork item is how lawsuits happen.
• Expensive fund menus. Revenue-sharing share classes, hidden 12b-1 fees, retail-priced funds inside the plan. Plan participants pay for this, and the fiduciary owns the decision.
• No participant education. A plan with 30% participation isn’t doing its job. People need to know what they have and how to use it.