As a small business owner, providing a retirement plan is not just a benefit for your employees—it's also a powerful tool to attract and retain top talent, foster loyalty, and offer potential tax benefits to both employees and the company. However, navigating the myriad retirement plan options can be overwhelming. To help you decide which plan is best for your business, this guide breaks down the most popular retirement plan options for small businesses, including their pros and cons.
Before diving into the plan options, it’s important to understand why offering a retirement plan is beneficial for your small business:
The most popular retirement plan options for small businesses include 401(k) plans, SIMPLE (Savings Incentive Match Plan for Employees) IRAs, and Simplified Employee Pension (SEP) IRAs. Here’s how the plans compare.
|
Feature |
401(k) Plan |
SIMPLE IRA |
SEP IRA |
|
Employer Eligibility |
Any business can adopt. |
Only businesses who do not offer other retirement plans and have fewer than 100 employees can adopt. |
Any business can adopt. |
|
Employee Eligibility |
Employers can set eligibility criteria, but employees must generally be allowed to participate if they are over 21 and have at least 1,000 hours of service in a 12-month period.
Regardless of the criteria selected, long-term, part-time employees must be allowed to participate. |
Employers can set eligibility criteria, but employees must be allowed to participate if they earned at least $5,000 in the previous two years and expect to earn at least that amount in the current year. |
Employers can set eligibility criteria, but employees must be allowed to participate if they are at least 21 years old, worked for the company in three of the last five years, and earned at least $750 in the current year. |
|
Elective Deferrals by Employees |
Allowed |
Allowed |
Prohibited |
|
Optional. Employee and employer contributions can be designated Roth. |
Optional. Employee and employer contributions can be designated Roth. |
Optional. Employer contributions can be designated Roth. |
|
|
Employer Contributions |
Safe harbor plans must contribute a 4% of compensation match or a fixed 3% of compensation to each eligible employee. Contributions must be 100% immediately vested.
QACA safe harbor plans must contribute a 3.5% of compensation match or a fixed 3% of compensation to each eligible employee. A 2-year cliff vesting schedule can apply.
Discretionary contributions are optional. A 6-year graded or 2-year cliff vesting schedule can apply. |
Mandatory. Employers must contribute a 3% of compensation match or a fixed 2% of compensation to each eligible employee
Contributions must be 100% immediately vested. |
Discretionary on an annual basis. For years a contribution is made, the same percentage of compensation must be contributed to each eligible employee.
Contributions must be 100% immediately vested. |
|
Employee elective deferrals cannot exceed the 402(g) limit annually: $23,000 + $7,500 catch-up for 2024
Total contributions cannot exceed the 415(c) limit annually: $69,000 + $7,500 catch-up for 2024 |
Employee elective deferrals cannot exceed an indexed limit annually: $16,000 + $3,500 catch-up for 2024.
Total contributions cannot exceed the elective deferral limit plus the 3% match or 2% fixed contribution annually. |
Annual contributions cannot exceed the lesser of:
|
|
|
Participant Loans and In-Service Withdrawals |
Optional |
Prohibited |
Prohibited |
|
Required. A plan can automatically pass by meeting safe harbor requirements. |
Exempt |
Exempt |
|
|
Required |
Exempt |
Exempt |
401(k) plans, SIMPLE IRAs, and SEP IRAs have pros and cons given their differences. Here are some of the most significant.
|
Plan |
Pros |
Cons |
|
401(k) Plan |
Highest contribution limits.
Highly attractive to employees
Most flexible eligibility, contribution, and vesting options.
Participant loans and in-service withdrawals are allowable. |
More complex administration.
Usually the highest cost.
Safe harbor and top heavy plans have a mandatory employer contribution requirement. |
|
SIMPLE IRA |
Usually easier and cheaper to set up and operate than a 401(k) plan.
Employees share responsibility for their retirement.
No discrimination testing or Form 5500 required. |
Lowest annual contribution limit.
Mandatory employer contribution requirement.
Employer contributions must be 100% immediately vested.
Employer cannot have another retirement plan. |
|
SEP IRA |
Easiest to set up and operate.
Often the cheapest option.
Flexible annual contributions – good plan if cash flow is an issue.
High annual contribution limit.
No discrimination testing or Form 5500 required. |
Employee contributions are not allowed.
The same percentage of compensation must be allocated to all eligible employees. |
Choosing the right retirement plan for your small business depends on several factors: the size of your workforce, the flexibility of contributions, and your administrative capacity. If you want high contribution limits and flexible plan design, a 401(k) is probably the best option. On the other hand, if you’re seeking a simple, low-cost plan, a SIMPLE IRA or SEP IRA may be more suitable.
Still not sure which plan is best? Talk to a 401(k) provider or your financial advisor.