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Popular 401(k) plan designs for small businesses
401(k) Optimizing your 401(k) plan Plan administration

Popular 401(k) plan designs for small businesses

Wendy Liu

Congratulations! You’ve decided to offer your employees a 401(k) that will help them save for retirement! Next step, design the plan.

Employers often ask, “What’s the right 401(k) plan design for a small business?” Getting plan design right is important–it determines which employees are eligible, the annual compliance testing requirements, and how much, if any, employee contributions the company makes to the employees’ retirement accounts.

The key questions you’ll need to ask are:

  • Do I have a high turnover?  If so, you may wish to have eligibility requirements of 6 months, or 1 year of service, to prevent you from having to administer accounts for employees who aren’t staying on. If you have a steady workforce, maybe you’ll want to allow everyone to participate immediately.
  • Will you make any employer contributions to your employees’ retirement accounts? If so do you want to make a contribution for everyone, or for only those participating? Profit sharing goes to everyone, match is only for those who make contributions.
  • Do you want highly compensated employees to be able to maximize their contributions, without having to make unexpected corrective contributions? If so, you may wish to elect a Safe Harbor plan.
  • Is your aim to retain employees or reward them for staying on? If the answer is yes, you may want to have a vesting schedule. Vesting schedules dictate how long employees must work at your company to be eligible for the benefit or any employer contributions.

To help you answer these questions, we analyzed data from 10,000+ Guideline 401(k) plans to determine the most popular plan designs. Hopefully the wisdom of the crowd—in addition to your particular goals, employee base, and budget—helps you craft the right 401(k) plan for your business.

Employee contribution: 68% of plans offer an employer contribution, of which 89% are matching contributions. To learn more about 401(k) matching, see The Small Business Guide to 401(k) Matching.

Safe Harbor design: 58% of plans are safe harbor, electing to forgo 401(k) Nondiscrimination Testing at year end. The most popular Safe Harbor plan design is the Safe Harbor basic match followed by the Safe Harbor enhanced match. Together, they make up 88% of Safe Harbor plans.

Service requirement: 45% of plans do not have a minimum service requirement before the employee is eligible to participate in the plan. Plans that have employer contribution tend to have more strict service requirements.

Vesting: 91% of plans with employer contributions have an immediate vesting schedule.

As you can imagine, the design you choose will influence employee participation and retention, the retirement outcomes for you and your employees, and the ongoing cost to your business of offering a 401(k). We’ll work with you to help design a plan that meets your goals. Schedule a demo with one of our retirement experts today.


Key definitions

We analyzed 10,010 Guideline 401(k) plans active as of January 30, 2020.

Employer contribution: Along with the employee’s elective deferrals, the employer can also choose to contribute to the employee’s 401(k) account. That amount is the employer contribution.

Plan design: If a plan design is not considered Safe Harbor (per Safe Harbor designs definitions below), it is a custom design. Custom designs are subject to nondiscrimination testing at year end but there may be ways to lower the cost of the contributions your company will make.

Safe harbor designs: There are 3 employer contribution formulas that qualify as Safe Harbor. Those contributions must vest immediately.

  1. Basic matching: The company matches 100% of all employee 401(k) contributions, up to 3% of their compensation, plus a 50% match of the next 2% of their compensation
  2. Enhanced matching: The company matches at least 100% of all employee 401(k) contributions, up to 4% of their compensation (not to exceed 6% of compensation)
  3. Non-elective contribution: The ex company contributes at least 3% of each employee’s compensation, regardless of whether employees make contributions

Service requirement & Eligibility: The amount of time the employee needs to be employed before he/she is eligible to participate in the 401(k) plan.

Vesting: Employers can designate service period requirements before the employee is entitled to own the employer contribution. The schedule is the vesting schedule, which can be graded or cliff. Under the graded approach, employer contribution accounts will gradually vest in increments—say, 20 percent per year of service. With cliff vesting, employer contributions vest all at once, after the employee serves the minimum length of time (not more than 3 years).