As a small business owner in Arizona, navigating the world of retirement planning can be overwhelming. With a variety of options available, it can be hard to determine which plan is best for your micro-business. Two retirement plans that have gained popularity among self-employed individuals and business owners are the Safe Harbor 401(k) and the Exe(k)utive 401(k). Both of these plans offer tax benefits and can be tailored to meet the unique needs of business owners in Arizona, including those operating in Tempe, AZ, and Phoenix. However, each plan has its advantages and drawbacks, depending on the size of your business, your retirement goals, and the structure of your business.
In this blog, we will break down the differences between the Safe Harbor 401(k) and the Exe(k)utive 401(k), helping you make an informed decision for your micro-business’s self-employed retirement planning.
Understanding Safe Harbor 401(k) Plans
The Safe Harbor 401(k) plan is a type of retirement plan designed to simplify the administrative process while ensuring that business owners can maximize their retirement savings. This plan is particularly beneficial for small business owners who want to avoid the complicated compliance testing that traditional 401(k) plans require. These compliance tests are designed to ensure that higher-earning employees (including business owners) are not disproportionately benefiting from the 401(k) plan compared to lower-earning employees. For small business owners in Arizona, the Safe Harbor 401(k) plan provides a straightforward solution.
In order to maintain compliance with IRS rules, Safe Harbor 401(k) plans require employers to make mandatory contributions on behalf of employees, even if those employees do not contribute to the plan themselves. These contributions can take the form of either a matching contribution (up to 4% of salary) or a non-elective contribution (usually 3% of salary), which is made regardless of whether employees contribute themselves. The upside is that business owners are allowed to make much larger salary deferrals (up to $22,500 in 2025 for employees under age 50, or $30,000 for employees over 50) without facing the limitations imposed by non-discrimination testing.
The Safe Harbor 401(k) plan is ideal for business owners who want to contribute the maximum amount to their retirement plan and avoid the hassle of annual compliance testing. In Arizona’s growing business environment, especially in cities like Phoenix, where small businesses are booming, the Safe Harbor 401(k) provides a great opportunity for self-employed individuals to save for retirement while offering employees a competitive benefit.
What Makes the Exe(k)utive 401(k) Different?
The Exe(k)utive 401(k) is another option for small business owners who are looking for more control over their retirement planning. This plan is similar to the traditional 401(k) in terms of contribution limits and structure, but it offers more flexibility and an increased focus on the business owner’s retirement needs. Designed specifically for high-income earners and micro-business owners, the Exe(k)utive 401(k) is tailored to those who want to save large amounts for retirement, often in a faster and more efficient manner.
The Exe(k)utive 401(k) is unique because it allows the business owner to make both employee and employer contributions. As the business owner, you can contribute as an employee, deferring a portion of your salary (up to $22,500 in 2025 or $30,000 if you’re over 50). On top of that, the employer (which could be you as the business owner) can contribute additional funds, usually up to 25% of the employee’s compensation, with a maximum employer contribution cap of $61,000 in 2025 (or $67,500 for individuals over 50). This provides a significantly higher contribution potential compared to other retirement plans, especially for those who want to maximize their retirement savings in a short amount of time.
Unlike the Safe Harbor 401(k), the Exe(k)utive 401(k) does not require mandatory employer contributions, but if you want to maximize your savings, you can make large contributions on your own behalf. The Exe(k)utive 401(k) is an excellent choice for Arizona-based business owners who are looking to fast-track their retirement savings while benefiting from tax-deferred growth. It’s particularly attractive for those who don’t have employees or have only a small number of employees and want to focus their contributions on their own retirement rather than distributing them evenly among employees.
Key Differences Between Safe Harbor 401(k) and Exe(k)utive 401(k)
Both the Safe Harbor 401(k) and Exe(k)utive 401(k) plans offer robust retirement saving options for Arizona business owners, but there are key differences that may influence your decision. One of the primary differences is the contribution structure. The Safe Harbor 401(k) requires employers to contribute on behalf of employees, either through a matching contribution or a non-elective contribution. This structure can be beneficial if you want to ensure that your employees are incentivized to save for their retirement, but it does limit the amount of control you have over your contributions.
In contrast, the Exe(k)utive 401(k) allows for larger contributions by the business owner, especially if you have no employees or only a small number of employees. If you have employees and choose to contribute on their behalf, you can still do so, but the plan is more focused on maximizing the owner’s savings. This plan gives you more flexibility in how you structure your contributions, which is a key factor for business owners who are looking to focus on their own retirement planning.
Another important difference is the administrative requirements. The Safe Harbor 401(k) is simpler to administer compared to the Exe(k)utive 401(k) because it avoids the need for complex compliance testing. This makes the Safe Harbor 401(k) ideal for small business owners who want a straightforward plan with minimal administrative burden. The Exe(k)utive 401(k), on the other hand, may require more time and effort to administer, especially if you are trying to manage both employee and employer contributions.
Considerations for Micro-Business Owners in Tempe and Phoenix
As a micro-business owner in Tempe, AZ, or Phoenix, you likely face unique challenges when it comes to retirement planning. Arizona’s growing business landscape is attractive to entrepreneurs, and creating a retirement strategy that aligns with your long-term financial goals is an essential part of ensuring financial security. One of the most important factors to consider when choosing between a Safe Harbor 401(k) and an Exe(k)utive 401(k) is the size of your business and your long-term retirement goals.
For those who operate solo or with a small team, the Exe(k)utive 401(k) offers a higher contribution limit and more flexibility in terms of how funds are allocated. If you do not have many employees or are the only employee in your business, the Exe(k)utive 401(k) could be the ideal choice, allowing you to save more for retirement while keeping the process simple.
However, if you want to build a retirement plan that benefits both you and your employees, the Safe Harbor 401(k) could be a better fit. This plan ensures that all employees have access to retirement savings opportunities, making it an attractive benefit for employees in a competitive job market like Phoenix. Furthermore, the Safe Harbor 401(k) minimizes the administrative burden, which can be particularly helpful for micro-business owners who may not have the resources for a full-time HR team.
Which Plan is Right for Your Micro-Business?
Choosing the right retirement plan for your micro-business in Arizona depends on several factors, including the number of employees, your own retirement goals, and how much control you want over your contributions. If you are looking to save as much as possible for your own retirement and have a small team or no employees, the Exe(k)utive 401(k) could offer the most flexibility and higher contribution limits. However, if you have employees and want to provide a retirement benefit that is simple to administer and complies with IRS regulations, the Safe Harbor 401(k) may be the right choice.
Ultimately, both plans offer valuable benefits, but understanding the nuances of each will help you make the best decision for your business and future retirement needs. Whether you are operating in Tempe, Phoenix, or elsewhere in Arizona, taking the time to evaluate your options and consult with a financial advisor will ensure that you choose the best path for your self-employed retirement planning.
Need Pension Consulting & Pension Plans in Phoenix, AZ?
Fiduciary Advisors, Ltd. is a business-to-business associated pension administrator based in Phoenix, Arizona, since 1990. We specialize in designing and planning employee retirement programs, pensions, profit sharing, and are third-party administrators for 401K for small- to medium-size businesses. We conduct enrollment meetings, prepare detailed actuarial calculations, cash-balance plans, and financial consultation for all businesses. Give us a call today for more information!