Retirement plans: 401(k), safe harbor and SIMPLE IRA
Traditional and safe harbor 401(k)s, the SIMPLE IRA and state auto-IRAs, with every 2026 limit.
No federal law requires a retirement plan either. A startup that offers one usually chooses between three: a 401(k) tested every year, a safe harbor 401(k) that buys its way out of the test, and a SIMPLE IRA. Some states push the other way: where a company offers nothing, a state auto-IRA may be mandatory.
Traditional 401(k)
- Good at
- Employer contribution optional
- Deferrals up to $24,500
- Watch for
- Annual nondiscrimination tests, which can limit what highly paid employees defer
- Form 5500 every year
- Best for
- Companies whose staff all defer at similar rates
Safe harbor 401(k)
- Good at
- Not subject to the complex annual nondiscrimination tests
- Deferrals up to $24,500
- Watch for
- A required, fully vested employer contribution
- Form 5500 every year
- Best for
- Founders and highly paid early employees who want to defer the maximum
SIMPLE IRA
- Good at
- Up to 100 employees
- Little administration
- Watch for
- Lower deferral limit: $17,000
- No other retirement plan allowed alongside
- Best for
- Very small teams that want a cheap, simple plan
In this lesson: the safe harbor 401(k) worked on Northwind, the SIMPLE IRA, and state auto-IRA mandates like CalSavers.
Pages in this lesson
3 pages go deeper, about 14 minutes in all. Read them in order, or open the one you need.
Where this lesson's rules come from
The sources behind this lesson's requirements, by kind. Background reading explains; it is never the authority for a rule. Anything marked as a convention is ours, not the rule-maker's.
- IRS guidance
- Notice 2025-67 (opens in a new tab)2026 retirement plan limitsPDF · Free to read
- IRS — 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500 (opens in a new tab)2026 catch-up contributions, including the age 60–63 limitFree to read
- IRS — 401(k) plan overview (opens in a new tab)Traditional, safe harbor and SIMPLE 401(k) plansFree to read
- IRS — SIMPLE IRA plan (opens in a new tab)SIMPLE IRA plans for employers with 100 or fewer employeesFree to read
- Background reading — not an authority
- Wikipedia, “401(k)” (opens in a new tab)401(k)Free to read
The words this lesson teaches
Each links to its glossary definition, which also names the authority behind it and the components that render it.
- 401(k) planA defined contribution retirement plan in which employees defer part of their pay, pre-tax or Roth, into their own accounts — up to $24,500 for 2026, plus catch-up from age 50 — usually with an employer match. A traditional plan is tested each year for nondiscrimination
- Safe harbor 401(k)A 401(k) that is not subject to the complex annual nondiscrimination tests because it makes a fully vested employer contribution — the basic match (100% of deferrals up to 3% of pay plus 50% of the next 2%), with written notice before the year, or 3% of pay to every eligible non-highly-compensated employee
- SIMPLE IRAA retirement plan for employers with 100 or fewer employees and no other plan: employees defer up to $17,000 for 2026 into their own IRAs, and the employer matches up to 3% of pay or gives 2% to everyone eligible. Set up effective by October 1 of a year
- State auto-IRAA state-run retirement program that employers without a retirement plan must make available, deducting employees' contributions from payroll unless they opt out: the employer's participation is mandatory, the employee's voluntary. California's CalSavers covers employers with one or more employees and charges $250, then a further $500, per eligible employee for noncompliance
- Elective deferralThe part of pay an employee chooses to put into a 401(k), 403(b) or SIMPLE plan instead of taking it as cash. Traditional deferrals are out of income-tax wages but stay in FICA wages