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SIMPLE IRA Versus Safe Harbor 401(k)

SIMPLE IRAs and safe harbor 401(k)s are employer-sponsored retirement plans that allow participants to defer salary into the plan and receive either a non-elective or matching contribution from the business owner. Let’s examine how each plan type may benefit the business owner and his or her employees.

ASSUMPTIONS

  • Two employees earn $40,000 each and contribute 4% of salary
  • The business owner (under age 50) earns $250,000 and contributesthe maximum salary deferral
  • Employer matching contributions: SIMPLE IRA – 3% | Safe Harbor 401(k) – 7%
  • Discretionary profit sharing contribution: 6%

SIMPLE IRA vs Safe Harbor 401k Chart_72.png

The business owner was able to more than double her personal contribution in the safe harbor 401(k) by making an additional $5,600 contribution to her employees – $21,000 in SIMPLE IRA versus $52,000 in safe harbor 401(k) for the business owner.

Feature SIMPLE IRA Safe Harbor 401(k)
Eligible Employers Any business with 100 or fewer eligible employees Any business
Plan Establishment Deadline October 1 October 1
Maximum Participant Eligibility Restrictions Earning at least $5,000 in any two preceding years and the expectation to earn $5,000 in the current year Age 21 or older with one year of service and 1,000 hours worked per year
Maximum Contributions for 2021 $27,000 per person ($33,000 with catch-up)

  • Salary deferral: $13,500 ($16,500 if age 50 or older)
  • Required employer contribution: 1) 2% non-elective contribution to all eligible employees OR 2) 100% match up to 3% of deferrals
$58,000 per person ($64,500 with catch-up)

  • Salary deferral: $19,500 ($26,000 if age 50 or older)
  • Required employer contribution: 1) 3% non-elective contribution to all eligible employees OR 2) 100% match up to 4% of deferrals
  • Additional optional matching and/or profit sharing contributions available 
Distributions Allowed at any time; however, penalties may apply if under age 59½ Allowed after triggering event; penalties may apply if under age 59½ (or age 55 when separated from service)
Annual 5500 Filling No Yes, unless the plan has less than $250,000
Additional Considerations
  • 100% vested immediately
  • Lower maintenance cost
  • No loans allowed
  • No Roth option
  • Potential 25% penalty on pre-59 ½ distributions for the first two years
  • 100% vested for salary deferrals and match; profit sharing may have vesting schedule*
  • Higher maintenance cost
  • Loans permitted
  • Roth option available
  • May offer additional creditor protection depending on state law 

*A qualified automatic contribution arrangement (QACA) for the safe harbor 401(k) may require a vesting schedule.

Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation.

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