RETIREMENT & OTHER CONCEPTS · 6 MIN READ

Employer Plans: 401(k) Safe Harbors, SEP, 403(b), and 457

A 401(k) plan lets employees defer part of their pay pre-tax (or as designated Roth) up to an annual dollar limit, with an extra catch-up for participants age 50 and over. Because highly compensated employees (HCEs) tend to defer more, the law imposes the ADP and ACP nondiscrimination tests, which compare HCE deferral and match percentages to those of non-highly compensated employees. Safe harbor designs buy automatic exemption from ADP testing: the employer either makes a matching contribution or contributes at least 3% of compensation to every eligible non-HCE whether or not the employee defers, with those contributions 100% immediately vested. A retroactively adopted non-elective safe harbor must be raised to at least 4%. Qualified automatic contribution arrangements (QACAs) pair auto-enrollment with a safe harbor formula, and the Pension Protection Act of 2006 added an ERISA preemption shield so automatic payroll deferrals cannot be blocked by state wage-withholding laws. Small-employer and nonprofit alternatives each have signature features. A SEP IRA takes only employer contributions, capped at the lesser of 25% of compensation or an indexed dollar limit ($70,000 for 2025) — and for the self-employed the percentage effectively works out to about 20% of net self-employment income after the required adjustments. SARSEPs, the old salary-deferral SEP, could not be established after 1996; only plans adopted before January 1, 1997 with 25 or fewer eligible employees may continue. SIMPLE IRAs replaced them with employer match formulas for employers without other plans. Section 403(b) tax-sheltered annuities are limited to public school employees and 501(c)(3) organizations — for-profit companies must use a 401(k). Section 457(b) plans split sharply: governmental 457(b) assets must be held in trust for participants, while tax-exempt-employer 457(b) plans must stay unfunded and exposed to the employer's general creditors, and their rollover options are far narrower. Recent federal legislation is fair game. The SECURE Act forces 401(k) plans to let long-term part-time employees defer once they complete 500 hours in consecutive 12-month periods (three periods originally, reduced to two by SECURE 2.0), and SECURE 2.0 requires high earners — those with prior-year FICA wages from the sponsor above $145,000 — to make catch-up contributions as Roth.