It made sense when you set it up. Then the business grew and nobody revisited it. Here is the math on what that gap is worth.
Most of the small business retirement plans I look at in mid-Michigan are SIMPLE IRAs. That made sense at some point. They’re easy to set up, there’s no annual filing, and when you have six employees and thin margins, easy matters.
But a lot of businesses outgrow that plan and nobody tells them. The payroll company that sold it isn’t going to call and suggest something better. So the plan sits there for eight years while the business doubles, and the owner never finds out what they’ve been leaving on the table.
Here’s what I mean concretely. In 2026, an employee under 50 can defer $17,000 into a SIMPLE IRA. In a 401(k), that number is $24,500. For someone over 50, the SIMPLE allows $21,000 with catch-up. The 401(k) allows $32,500. And once you factor in employer contributions, a 401(k) can take total annual contributions up to $72,000 per person. A SIMPLE tops out around $21,000 in employer and employee money combined for most participants.
If you’re an owner trying to save aggressively and reduce taxable income, that gap is the whole ballgame.
With a SIMPLE IRA you have two options and both of them are rigid. You either match dollar-for-dollar up to 3% of pay, or you make a 2% contribution for everyone whether they participate or not. That’s it. No flexibility, no design.
A 401(k) opens up two things that matter a lot.
The first is safe harbor. A safe harbor 401(k) means you make a required contribution — commonly a 4% match or 3% across the board — and in exchange the plan automatically passes the annual nondiscrimination testing. That testing is what stops highly compensated employees, meaning you, from maxing out when the rank and file aren’t participating. Without safe harbor, I’ve seen owners get refund checks in March because their own deferrals failed testing. Safe harbor makes that go away permanently.
The second is profit sharing. This is the part most owners have never had explained to them. Profit sharing is a discretionary contribution you decide on each year based on how the business did. Good year, you fund it. Tight year, you don’t. And with the right allocation formula, particularly new comparability or age-weighted designs, you can direct a much larger share of that contribution toward the owner and key people while still satisfying the rules.
$14,000 → $60,000+
An owner I worked with was putting about $14,000 a year into a SIMPLE. We moved to a safe harbor 401(k) with a profit sharing component. His personal number went to just over $60,000, and the deduction to the business covered a meaningful chunk of the additional employee cost. He wasn’t spending dramatically more. He was allocating it differently, and most of it was landing in his own account.
Once we get past the structure, I look at what people are actually invested in. And this is where I get frustrated on behalf of participants.
I regularly open up plans where the default investment is a stable value fund or a money market paying next to nothing, and half the workforce is sitting in it. Not because they chose it, but because it was the default and nobody ever helped them change it. That’s a 28-year-old with 40 years until retirement, earning maybe 2%, because nobody sat in a room with them for twenty minutes.
Or I find a fund lineup with forty options, which sounds generous but is actually paralyzing. When people are overwhelmed they pick nothing, or they pick everything and end up with a portfolio that doesn’t make sense.
A good lineup is built, not accumulated. It needs to be broad enough to cover the major asset classes, simple enough that a person can understand it, and it needs a real qualified default — usually a target date series — for people who won’t make a choice. Then it needs to be reviewed on a schedule, with the fees documented, because that’s your fiduciary obligation as the plan sponsor whether you’ve been thinking about it or not.
You can have a perfectly designed plan with a great fund lineup and still have a participation rate of 40%. The structure isn’t the whole job.
The plans that work are the ones where somebody shows up. Where new hires get walked through enrollment instead of handed a login. Where there’s a meeting once or twice a year that isn’t a compliance formality. Where an employee can ask what a Roth deferral is, or whether they should take a loan, or what happens to their old 401(k) from their last job, and get a real answer from someone who isn’t selling them anything.
That’s most of what I do on the plan side. I handle the design and the investment lineup and the fiduciary documentation, but the part that changes outcomes is being in the building.
And it does something for the business too. Employees who feel financially organized are less distracted and less likely to leave. Retirement benefits are one of the few things a 30-person company in Vestaburg or Alma can offer that competes with a much larger employer. But only if people understand what they have.
SIMPLE IRAs generally have to be terminated effective at the end of a calendar year, with notice to employees by early November. A new safe harbor 401(k) generally has to be effective by October 1. Both of those mean this is a fall decision for a January start. If you begin thinking about it in February, you have usually lost the year.
If you already have a 401(k), the questions are different. When was the fund lineup last reviewed? Do you have safe harbor, and if not, are you passing testing? Is there a profit sharing component, and is the allocation formula actually working in your favor? When did somebody last sit down with your employees?
I’m happy to look at any of it. Send me your plan documents and last year’s testing results and I’ll tell you what I see, whether or not you end up working with me.
Generally when the owner wants to contribute more than a SIMPLE allows, when the business has grown enough to absorb the administrative cost, or when nondiscrimination testing is capping owner deferrals. The switch requires terminating the SIMPLE effective at year end, with employee notice typically due by early November for a January 1 start.
For 2026, a SIMPLE IRA allows $17,000 in employee deferrals versus $24,500 in a 401(k). Total annual additions in a 401(k) can reach $72,000 per person, while a SIMPLE realistically tops out near $21,000 combined. A 401(k) also permits safe harbor design, profit sharing, Roth deferrals, and loans.
A safe harbor 401(k) requires the employer to make a set contribution, commonly a 4% match or 3% to all eligible employees, and in exchange the plan automatically passes annual nondiscrimination testing. It prevents the situation where an owner's deferrals are capped or refunded because rank-and-file participation is low.
Send me your plan documents or last year’s returns and I’ll tell you what I see — whether or not you end up working with me.
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Sage W. DeMull, PPC® is a fee-based fiduciary advisor at DeMull Financial, 2624 Lake Lansing Rd Ste 200, Lansing, MI 48912. Figures reflect 2026 IRS limits per Notice 2025-67 and are adjusted annually. This is general information, not individualized tax, legal, or investment advice — your situation may differ, and you should consult your own tax professional. Securities and advisory services offered through LPL Financial, member FINRA/SIPC.