Offering a retirement plan is a great way for small businesses to attract and retain employees. Retirement plan options also help both employee and small business owner shelter income from taxes while promoting saving for retirement. To accommodate the varied needs of individual small businesses, the tax code offers several types of small business retirement plans. As such, it’s important to compare them against each other to find the best retirement plan for everyone involved.
What Retirement Options Are There for Small Businesses?
- Simplified Employee Pension Plan (SEP) : Under this plan, the employee establishes an IRA and the employer contributes up to 25% of an employee's compensation each year. There is no employee contribution in this SEP plan. It's simple, and it's popular with small family-owned businesses.
- Savings Incentive Match Plan for Employees (SIMPLE) : Companies with fewer than 100 employees can set up a SIMPLE IRA plan. Each employee opens an IRA account, and both employer and employee contribute money to it. There is minimal paperwork and no separate administration fees. It's an efficient way to provide a retirement plan to a large group of people, that is, large by small-business standards.
- Traditional 401(k) : This retirement plan allows employees to set aside a portion of their salary for retirement on a pre-tax basis. Designated Roth Contributions are also an available option to provide employees the ability to contribute a portion of their salary on an after-tax basis. Companies offering a 401(k) need to file paperwork each year to ensure their plan complies with IRS regulations. But still, a traditional 401(k) plan is a good option for businesses that plan to grow, and that want flexibility in how much money they contribute on behalf of eligible employees.
- Safe Harbor 401(k) : This type of 401(k) plan is similar to a traditional 401(k) plan in many respects. Under a Safe Harbor Plan, the administration is reduced because the plan includes either a matching or an automatic employer contribution that allows all employees to potentially contribute the maximum amount each year to their accounts. Although it is less flexible than a traditional 401(k), it may be easier for a small business to operate and comply with IRS regulations.
- Individual 401(k) : A 401(k) plan for a company that only has an owner(s) and their spouse, if applicable, with no common law employees. An individual 401(k) plan may allow the owner(s) to set aside more income than other types of retirement plans.
