Starting a retirement plan for your small business can be exciting – until you learn how many options are out there and the cost of setting one up.
Among the many options, there are three retirement plans that are likely the best fit for you if your business has employees: 401(k) plans, SEP IRAs or SIMPLE IRAs. Those plans are typically the easiest for small business owners to set up, maintain and customize.
Learn what the pros, cons and characteristics are for each plan so you can make the best decision for your business – and your employees.
Contents |
| Terms to know |
| At a glance: SIMPLE IRAs vs. SEP IRAs vs. 401(k)s |
| SIMPLE IRA |
| Simplified Employee Pension (SEP) |
| 401(k) plan |
| How to create a retirement plan |
There are lots of numbers and acronyms associated with retirement plans. Here are the common ones and what they mean.
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The best retirement plan for your business depends on your cash flow, number of employees, growth and more. Here’s how some of the most popular retirement plans for small businesses compare. Plans can be customized, but these are the general rules for SIMPLE IRAs, SEP IRAs and 401(k)s.
| SIMPLE IRA | SEP IRA | 401(k) | |
| Who can contribute? | Optional for employees to contribute; mandatory for employers to contribute | Employees cannot contribute; mandatory for employers to contribute | Optional for employees to contribute; optional for employers to contribute (unless a safe harbor option is selected) |
| When are employees required to qualify? (You may offer these plans to employees before this point as well.) | When an employee has been paid more than $5,000 by your company | When an employee who is at least 21 years old has worked for your company in three of the last five years | When an employee who is at least 21 years old has worked for your company for at least one year |
| Are employer contributions tax-deductible? | Yes | ||
| Are employees 100% vested? | Employees are 100% vested, including employer contributions | Employees are 100% vested | Vesting amount varies depending on options selected |
| Is annual IRS testing required? | No | No | Yes |
| Employee contribution limits |
$15,500 (under 50) or $19,000 (over 50) for 2023. $16,000 (under 50) or $19,500 (over 50) for 2024 |
N/A (employee contributions are not allowed) |
$22,500 (under 50) or $30,000 (over 50) in 2023 $23,000 (under 50) or $30,500 (over 50) in 2024 |
| Employer contribution limits |
2% of employee’s compensation (regardless of employee deferral) or 3% of employee's compensation (when doing a dollar for dollar match of employee contributions) |
Lesser of $66,000 or 25% employee’s compensation (2023) Lesser of $69,000 or 25% employee’s compensation (2024) |
Lesser of $66,000 or 25% employee’s compensation (2023) Lesser of $69,000 or 25% employee’s compensation (2024) |
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a retirement plan designed for businesses with up to 100 employees. Most employees would have to be part of the plan if you offer it, since the only requirement is if they’ve made at least $5,000 in the company.
Both employees and employers can make contributions. Employers are required to contribute to employees’ plans.
A SIMPLE IRA is best for most small businesses that are looking for a low-maintenance plan but also have enough cash to make mandatory contributions. There aren’t many strict rules and regulations around SIMPLE IRAs, so they’re also relatively easy and inexpensive to set up.
SIMPLE IRAs also have a limit of 100 employees.
A SIMPLE IRA is one of the easiest plans to set up and manage for small businesses. Here are some of its perks:
Even though they’re easy to run and set up, they might not be good for employers who may not be able to make contributions.
A Simplified Employee Pension (SEP) is a type of IRA where only employers can contribute to their employees’ retirement. They may be called SEP IRAs or SEPs.
SEPs are tax-deferred accounts, which means you don't pay taxes on contributions –.
A SEP is best for small businesses with less than 10 employees. Since the employer is solely responsible for making contributions, it can get expensive – which is why it’s not ideal for businesses with dozens of employees.
This type of plan may also work best for you if your cash flow varies throughout the year. One of the perks of having a SEP is that there aren’t hard contribution deadlines throughout the year, so you can make your required contributions whenever is best for you – as long as they’re made by the earlier of your tax return’s due date (including extensions), or when it’s filed.
This plan is also popular among small business owners who are the only employee of their business.
A SEP plan does require you to make all contributions to your employees’ plans, but there are upsides that come with that.
Despite their flexibility and low-maintenance requirements, SEP IRAs have downsides you should be aware of.
A 401(k) plan is the most flexible plan for small business owners. Many retirement plan providers can customize a 401(k) to fit your business’ needs. You can choose to go through the traditional 401(k) route, which allows your employees to make tax-free contributions – or choose a Roth 401(k) and take tax-free distributions. You can offer both options to employees.
It’s also flexible because you can decide, as the employer, whether you want to contribute to employees’ plans (if you’re not using a safe harbor option). Some retirement plans, like SEP IRAs and SIMPLE IRAs require employers to make contributions.
There’s also a safe harbor 401(k) plan, which does require you to make contributions to your employees’ plans – but gives you some wiggle room on how you can do that.
A 401(k) plan is best for businesses that are scaling quickly since there’s no limit on the number of employees needed to qualify for one.
It may also be a good fit for any size employer who wants to offer employees a retirement plan, but doesn’t necessarily have the cash flow to make their own contributions. Unlike SEP IRAs and SIMPLE IRAs, employer contributions aren’t mandatory for most 401(k) plans.
A 401(k) is one of the easiest plans to customize for businesses with employees. Here’s why they’re a great fit for some businesses:
A 401(k) plan may be best for your business – but it comes with some administrative burdens.
The best way to create a retirement plan for your employees is using a third-party account provider. The right provider for you depends on what type of plan you want and how much you’re willing to spend.
Here are some of the most popular retirement plan providers:
There are ways to set up a retirement plan on your own, but no small business owner should go that route. Retirement plans are complicated and wrapped with rules and regulations no matter which plan you go with. There are also hefty penalties and fines if you make a mistake.
Each of the reputable providers mentioned above offer plans designed for small businesses. Compare their prices and services or talk to your CPA about which provider and plan is best for you.
Researching retirement plans for your employees for the first time can be confusing and overwhelming. There’s a slew of acronyms like IRAs and numbers like 401(k) that can make the process much harder.
But as a small business owner, the three best choices for retirement plans are typically SIMPLE IRAs, SEP IRAs and 401(k) plans. Although there are several differences in their contribution limits, IRS regulations, and employer contribution rules, those plans are typically the easiest to set up and maintain.
If you’re not sure which plan your small business should opt for – or what the tax implications of the plan you’re currently on are– schedule a free call with a DiMercurio Advisors team member today. You don’t have to make sense of your business’ taxes alone.