Retirement plans for small business owners to consider

Why offer a retirement plan as a small business

A retirement plan can be one of the more meaningful benefits a small business offers. For employees, it provides a structured way to save for the future. For business owners, it can be a way to build personal retirement savings while potentially reducing taxable income. Offering a retirement plan may also help with hiring and keeping employees. Benefits like employer-matched retirement contributions can make a small business more competitive, even when other perks are limited. There may also be tax advantages worth exploring. Small businesses that start a new retirement plan may qualify for federal tax credits to help offset setup costs. A tax professional can help you understand what may apply to your situation.

Compare small business retirement plans at a glance

The table below offers a quick overview of common retirement plan types. Plan details, limits and requirements can change, so consider verifying current figures with the IRS or a financial professional before making a decision.

SEP IRA plans for small businesses

A Simplified Employee Pension (SEP) IRA is a retirement plan that allows employers to make contributions directly to employee IRA accounts. It can be a good fit for self-employed individuals and small businesses of almost any size. One appeal of a SEP IRA is its simplicity. According to the IRS, SEP plans can have lower startup and operating costs than conventional retirement plans and can often be set up using a single form. Under a SEP IRA, only the employer contributes. There are no employee salary deferrals. Each eligible employee must have their own IRA account, and the employer contributes the same percentage of compensation for all eligible employees. A few things to know about SEP IRAs:

• Contributions: Employers can contribute up to 25% of an employee's compensation each year, up to the current annual limit. Contributions are flexible and can vary from year to year.
• Investment growth: Earnings in the account grow tax-deferred until withdrawal.
• Tax deduction: Employer contributions may be tax-deductible for the business.
• Eligibility: A SEP IRA must generally be available to all employees who are at least 21 years old, have worked for the employer in at least three of the past five years and have received the SEP minimum compensation amount from the employer in the current year. Employers may use less restrictive requirements.

SIMPLE IRA plans for small businesses

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is designed for businesses with 100 or fewer employees. It allows both the employer and employees to contribute to individual IRA accounts, making it a shared savings approach. SIMPLE IRAs generally have fewer employer filing and administrative requirements than many 401(k) plans, which can make them easier to manage than some other plan types. Provider fees may apply. Here is what to know about SIMPLE IRAs:

• Employee contributions: Eligible employees may choose to defer a portion of their pay before taxes, up to $17,000 in 2026. If the plan permits, the general catch-up limit is $4,000 for employees age 50 or older. A $5,250 catch-up may apply for employees ages 60 to 63, and certain SIMPLE plans may allow a higher base contribution limit.
• Employer contributions: Employers are generally required to either match individual employee contributions up to 3% of compensation or make a non-elective contribution of 2% of compensation for all eligible employees.
• Flexibility: Employers may adjust the matching percentage from year to year, though certain restrictions apply.
• Tax treatment: Employee contributions are made pre-tax and investment earnings grow tax-deferred until withdrawal.
• Eligibility: Employees who have earned at least $5,000 during any two prior years and expect to earn that amount in the current year may be eligible to participate.
• Business size: If a business grows beyond 100 employees who earned at least $5,000 in compensation in the prior year, a SIMPLE IRA plan may continue for up to two additional years before the plan expires.

Small business 401(k) plan options

A 401(k) plan allows employees to defer a portion of their salary for retirement, typically on a pre-tax basis. Some plans also allow after-tax Roth contributions. There are several types of 401(k) plans a small business might consider.

Traditional 401(k)

A traditional 401(k) can work for businesses of most sizes and offers flexibility in how employer contributions are structured. Employers are not required to match employee contributions, though many choose to.

• Employee contributions: Employees may defer up to $24,500 in 2026. Employees who are age 50 or older at the end of the calendar year may be eligible for additional catch-up contributions.
• Employer contributions: Employers may choose to match contributions, offer profit-sharing contributions or both.
• Compliance: Traditional 401(k) plans require annual nondiscrimination testing to confirm the plan does not unfairly favor highly compensated employees. An annual Form 5500 filing is also required.
• Eligibility: Plans may generally require employees to be age 21 and complete one year of service. Long-term part-time employees who complete at least 500 hours in each of two consecutive 12-month periods may also need to be allowed to make elective deferrals.

Safe harbor 401(k)

A safe harbor 401(k) is similar to a traditional 401(k) but includes a required employer contribution that allows the plan to skip annual nondiscrimination testing. This can make it simpler to administer and may allow business owners to contribute more to their own accounts.

• Employer contributions: Employers must contribute either a matching or non-elective contribution for eligible employees. One common matching formula requires 100% of the first 3% of compensation deferred, plus 50% of the next 2%.
• Vesting: Required employer contributions under a traditional safe harbor plan are generally fully vested when made. Some Qualified Automatic Contribution Arrangement (QACA) safe harbor plans may use a vesting schedule of up to two years.
• Annual notice: Certain safe harbor plan designs require employers to provide eligible employees with an annual notice. The notice requirement generally does not apply to nonelective safe harbor plans.
• Establishment deadline: A new safe harbor 401(k) plan generally must be established by October 1 of the applicable plan year, assuming a calendar year plan.

Individual 401(k)

An individual 401(k) is designed for business owners who have no employees other than a spouse. It can allow the owner to contribute both as an employee and as an employer, which may result in higher total contributions compared to other plan types.

• Who qualifies: This plan type may be available to sole proprietors, partnerships, LLCs and incorporated businesses, including S corporations, as long as there are no common-law employees.
• Contributions: Owners may contribute as both an employee and an employer. As an employee, they may defer up to $24,500 in 2026 ($32,500 for age 50 and over). As an employer, they may make a profit-sharing contribution of up to 25% of eligible compensation. The combined limit for 2026 is the lesser of 100% of the participant’s compensation or $72,000, before applicable catch-up contributions. If self-employed, see IRS Publication 560 for guidance on calculating your allowable contribution.
• Loan provision: Some individual 401(k) plans include a loan provision that may allow the owner to borrow a portion of the account balance.
• Establishment deadline: The plan generally must be established by the last day of the fiscal year for the business.

Starter 401(k) and newer retirement plan options

The SECURE 2.0 Act, passed in 2022, introduced several changes to retirement plan rules that may be relevant for small business owners. One addition is the starter 401(k). The IRS classifies the starter 401(k) as a new category of safe harbor 401(k) plan, available for plan years beginning after December 31, 2023. Because it carries safe harbor status, it is not subject to the annual nondiscrimination testing required by traditional 401(k) plans, which can reduce the administrative burden for small businesses.

A few things to know about starter 401(k) plans:

• Contributions: Only employee salary deferrals are allowed. Employers are not required to make contributions or match.
• Contribution limits: Employees may defer up to $6,000 in 2026. Employees aged 50 or older may contribute an additional $1,100.
• Auto enrollment: Starter 401(k) plans require automatic enrollment at a deferral rate between 3% and 15%.

Tax credits for starting a small business retirement plan

Eligible small businesses may qualify for federal tax credits when starting a new retirement plan. These credits were expanded under the SECURE 2.0 Act and can help offset the cost of getting a plan up and running. Two credits worth knowing about:

• Startup cost credit: Eligible employers may be able to claim a tax credit of up to $5,000 per year for the first three years after starting a new retirement plan.
• Automatic enrollment credit: Employers who add an automatic enrollment feature to a new or existing plan may qualify for an additional credit of $500 per year for the first three years.

Tax credit eligibility depends on factors like business size and whether you have previously offered a retirement plan. A tax professional can help you determine what may apply to your situation.

State retirement plan requirements

Some states have passed laws requiring employers to offer employees a retirement savings option or automatically enroll them in a state-sponsored program if no other plan is in place. These requirements vary by state and can change, so it is worth confirming what applies to your business. A financial professional or HR resource can help you understand your obligations and whether a private retirement plan may allow you to opt out of a state-sponsored program.

How to choose a retirement plan for your small business

There is no single retirement plan that works for every business. A few questions can help you narrow down the options:

• Employees: Do you have employees, or is it just you and possibly a spouse? Some plans are designed specifically for owner-only businesses.
• Contributions: Do you want employees to contribute, or do you prefer an employer-funded plan?
• Employer flexibility: How much do you want to control what you contribute each year? Some plans require a fixed employer contribution while others offer more flexibility.
• Administration: How much paperwork and compliance management can your business handle? Some plan types require more ongoing maintenance than others.
• Cash flow: Can your business make consistent contributions, or do you need the flexibility to contribute more in strong years and less in slower ones?
• Your own savings: Are you looking to maximize what you save for yourself, or is the priority providing a benefit to employees?

A tax professional or financial professional can help you weigh these factors and compare options based on your specific situation.

Questions about small business retirement plans

Q: How does a small business 401(k) work?

A: A small business 401(k) works similarly to a 401(k) at a larger company. Eligible employees can defer a portion of their salary before taxes and the employer may choose to match contributions. The business is responsible for plan administration, including annual compliance filings.

Q: How can a small business offer a 401(k)?

A: Small businesses can set up a 401(k) through a financial institution, payroll provider or benefits administrator. Setup typically involves choosing a plan type, establishing a plan document and enrolling eligible employees. A financial professional can help guide the process.

Q: How do small business owners save for retirement?

A: Business owners have several options, including SEP IRAs, SIMPLE IRAs and individual 401(k) plans, depending on whether they have employees and how much they want to contribute each year. A financial professional can help identify the right fit.

Q: How do you set up a retirement plan for a small business?

A: The setup process varies by plan type. SEP IRAs tend to be the simplest to establish. 401(k) plans require more documentation and ongoing compliance. Working with a financial professional or plan administrator can help simplify the process.

Next steps for small business owners

Choosing a retirement plan may involve tax, legal and administrative considerations. A tax professional, financial professional or plan administrator can help you compare options for your business. You can also learn more about how 401(k) employer matching works and explore other retirement and small business resources on Simple Insights. A State Farm agent can help you review business insurance options as your company grows.