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Top Retirement Plans for Small Businesses


As a small business owner, selecting the right retirement plan is crucial for attracting and retaining talented employees while also allowing you to save tax-efficiently for your own retirement. With several options available, understanding the key differences can help you decide which plan aligns best with your goals and situation.


SEP IRA

A Simplified Employee Pension (SEP) IRA allows employers to contribute up to 25% of each eligible employee's compensation annually, up to a $66,000 cap in 2023. Contributions are flexible year-to-year based on profits.


Pros: Low operational costs, minimal administration, contributions are tax-deductible

Cons: No employee salary deferrals, all eligible staff must receive the same percentage contribution


  • Ideal for any business size - self-employed up to larger small businesses

  • No employee count limitations

  • Simple administration regardless of number of employees


SIMPLE IRA

The Savings Incentive Match Plan for Employees (SIMPLE) IRA combines employee salary deferrals up to $15,500 in 2023 with mandatory employer contributions as either a match (up to 3%) or 2% non-elective contribution.


Pros: Inexpensive to administer, allows employee deferrals

Cons: Employer contributions are required annually, lower contribution limits


  • Best suited for businesses with 100 or fewer employees

  • Avoids compliance testing required for larger 401(k) plans

  • Easy option for companies just starting out


401(k) Plan

This option enables employee salary deferrals up to $22,500 in 2023 ($30,000 if over 50), plus employer contributions. Total combined contributions cap at $66,000.


Pros: Higher contribution limits, substantial tax benefits, ability to add vesting schedules

Cons: Increased administration and compliance testing, costlier than IRA-based plans


  • Most ideal for small businesses with between 10-100 employees

  • Compliance testing is required once over 100 employees

  • Allows high contribution limits beneficial for larger staffs


Defined Benefit Plan

As a traditional pension, employer contributions fund a specified retirement benefit for employees, based on actuarial calculations. Allows very large contributions.


Pros: Massive contribution potential, assets grow tax-deferred

Cons: Significant ongoing costs and administration, required annual contributions


  • May work well for businesses with 10+ employees, mature owners/principals

  • Higher administration costs make funding easier with larger employee base

  • Enables maximizing contributions for owner nearing retirement


Solo 401(k)

For self-employed individuals or owner-only businesses. Functions similar to a traditional 401(k) but avoids the compliance testing and administration.


Pros: High contribution limits up to $66,000 for 2023, flexibility

Cons: Only suitable if no employees beyond owner/spouse


  • Perfect fit for self-employed individuals or owner-only businesses

  • No employees besides the owner and spouse allowed

  • Simple administration without compliance testing


Other possibilities include profit-sharing or cash balance plans. However, these additional options bring added complexity and regulatory requirements.


Profit-Sharing Plan

  • Can work for any sized small business

  • Most popular with companies having consistent profits to fund contributions

  • Greater complexity than SEP for self-employed/few employees


Cash Balance Plan

  • Designed for established small businesses with consistent profits/cash flow

  • Allows maximizing tax-deferred contributions for owner age 50+

  • Higher costs make more sense with larger employee count to spread expenses


So in essence, SEP/SIMPLE IRAs are best for smaller companies just starting out, while 401(k)s, defined benefit, or cash balance plans can maximize contributions for larger, mature small businesses able to handle the increased administrative costs.


The ideal retirement plan depends on factors like your business structure, employee count, cash flow needs, goals for contributions and tax deductions. Working closely with an accountant can help model out which retirement offering best positions your small business for future success.

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