Can Employers Participate in Their Company-Sponsored Retirement Plan?

Your clients may provide company-sponsored retirement plans for their employees, but are your clients participating themselves? The greater question may be, are they even aware that they can participate in their company-sponsored retirement plan?

In your discussions with your clients regarding their retirement plans, inform them that they can also participate if they are not currently doing so. There are a few options your clients can choose from, let’s take a look at them and the necessary eligibility requirements.

Key Takeaways:

• If your business-owner client is eligible, they could prepare for retirement by participating in their company-sponsored plan.
• A business owner can participate in a 401(k), safe harbor 401(k), or a solo(k) if they meet certain requirements.
• Employers can also receive beneficial tax breaks for starting new plans if they don’t currently sponsor one.

What are the eligibility requirements for employer participation?

Business owners can participate in their company-sponsored retirement plan if they are the owner or an employee of the company that is sponsoring the plan. ePlan Services provides various retirement plans for employers as well as their employees.

Traditional 401(k) Plan:

This type of retirement plan is a straightforward and flexible savings solution. It is funded using a percentage of the participants’ pre-tax income. With a 401(k) plan, participants can also adjust their contribution amounts as well as choose whether to invest conservatively or aggressively. It is important to note that traditional 401(k) plans are subject to certain compliance tests to ensure that highly compensated employees such as business owners don’t receive disproportionately larger benefits than non-highly compensated employees. These tests include the following:

• Top-Heavy Testing — Compares total account assets of highly compensated employees to non-highly compensated employes to ensure that HCEs don’t hold more than 60% of plan assets. If this is the case, the plan is said to be top-heavy.
• ADP Testing—The Actual Deferral Percentage test compares the deferral percentages of highly-compensated employees and non-highly compensated employees.
• ACP Testing — The Actual Contribution test is calculated the same as the ADP, however, it also calculates employer matching and post-tax contributions.

Safe harbor 401(k):

A safe harbor 401(k) functions much like a traditional 401(k) plan except that employers are required to make contributions to participant accounts to be considered a safe harbor 401(k). There are two types of safe harbor 401(k) plans:

• Traditional — Employers must contribute to employee accounts. These contributions can be a match or a non-elective contribution. These employer contributions are also immediately vested.
• Auto-enrollment — Also known as a Qualified Automatic Contribution Arrangement, (QACA), employers are automatically enrolled in the company’s safe harbor 401(k) plan with the option to opt out.

A safe harbor plan is ideal for employers who are interested in exempting their plan from certain non-discrimination tests.

Solo(k):

Does your client own their own business with no employees? In this case, a solo(k), also called an individual 401(k), makes a smart choice for them. Like a standard 401(k) plan, there are two methods of contributing to a solo(k) plan.

• Traditional — In a traditional solo(k) plan, your client will make tax-deferred contributions, meaning they won’t pay taxes on the funds until the time of withdrawal.
• Roth — This type of plan is funded with post-tax dollars so your client will not have to pay taxes on their funds at the time of withdrawal.

Why should employers consider a 401(k) or safe harbor 401(k) instead of an IRA?

The biggest advantage of choosing a 401(k) over an IRA is the amount that participants can contribute. The contribution limit for a 401(k) plan and safe harbor 401(k) as of 2025 is $23,500. In contrast, the contribution limit for a traditional IRA is $7,000 and only $16,500 for a SIMPLE IRA.

This alone highlights how much more you can save for your future with a 401(k) account. An ePlan Services 401(k) also provides employers and participants with a participant dashboard that allows you to make changes to your account with just the click of a mouse. But these aren’t the only benefits of a 401(k), let’s take a look at some of the others.

Employer contributions and vesting:

A safe harbor 401(k) plan permits four methods of profit sharing. A SIMPLE IRA doesn’t allow profit sharing at all. Both plan types allow employer matching with slight differences.

• SIMPLE IRA — There is a mandatory 3% employer match for at least 3 out of 5 years of worked and 1% minimum for the remaining 2 years. Alternatively, employers can make a 2% non-elective employer contribution.
• Safe harbor 401(k) — Employers must make a 4% employer match or a 3.5% match with an auto-enrollment feature. The other option is a 3% non-elective employer contribution.

Both SIMPLE IRAs and safe harbor 401(k)s offer immediate vesting for employer matching and non-elective contributions. However, with a safe harbor 401(k), there may be a two-year vesting period for an auto-enrollment plan. Safe harbor 401(k)s can also come with a vesting schedule for profit sharing contributions.

Loans:

Participants are not permitted to take a loan out on a SIMPLE IRA. A 25% early withdrawal fee may be applied as well if the withdrawal is made within two years of participation. Safe harbor 401(k) accounts can allow participants to take out loans. The interest on the loan is repaid to the participants 401(k) account.

How can employers benefit from participating in a retirement plan?

Business owners need to consider their own retirement as well, not just their employees’. The earlier your clients begin saving for their future, the more time their funds will have to mature. In a time where Social Security won’t likely be enough to live on, your client’s retirement funds can be a key source of income they need when it’s time to stop working.

Conclusion:

If your clients have done their due diligence by providing a retirement plan option for their employees, they’re already showing that they care about their employees’ futures. However, it’s your duty as their financial advisor to ensure that they consider their own futures by participating in their company-sponsored retirement plans as well. Doing so can make all the difference in their retirement road ahead.