Why have a small business retirement plan?
Retirement plans also offer tax benefits to the business, including the ability to deduct contributions, and for certain eligible employers, take a tax credit up to $500 per year for three years.
Retirement plans for small businesses can be easy to administer and maintain. Once the plan is set up, the primary responsibilities of the business owner are depositing plan contributions and providing plan notices to employees.
A 401(k) plan can also allow after-tax Roth contributions, which will be taxable to you when you contribute them to your plan account but are tax-free if not withdrawn until you retire. Savers credits are also available for those who qualify.
Small business retirement plans – know your options
Providing a retirement plan is one of the most effective ways business owners can help themselves and their employees prepare for retirement.
One common myth among business owners is that offering a retirement plan to employees is not affordable. However, small business plans do not have to be complicated or expensive. Three types of retirement plans are popular with small businesses: SEP, SIMPLE IRA, and 401(k). Understand your options and the benefits available under each type of plan, and you will find the one that is the right fit for your company.
Types of Small Business Retirement Plans:
SEP Plan
A Simplified Employee Pension (SEP) plan is an IRA-based retirement plan funded only with employer contributions. The employer may decide from year-to-year whether to make contributions as well as an amount to contribute. SEP contributions are deposited in an eligible employee’s traditional IRA. A SEP plan could be suitable for both a self-employed business owner and an employer with employees.
SIMPLE IRA Plan
A Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA plan is another IRA-based retirement plan option for small businesses. Only businesses with 100 or fewer employees may establish a SIMPLE IRA plan. A SIMPLE plan is like a 401k plan in that employees can defer a portion of their salary.
Unlike a 401(k) plan which requires complex nondiscrimination testing, SIMPLE IRA plans have no testing requirements.
In exchange for the more straightforward administration requirements, SIMPLE IRA plans have lower contribution limits than 401(k) plans and require the employer to make a matching or non-elective contribution for eligible employees.
A SIMPLE IRA plan would not be appropriate for a self-employed individual with no employees.
Small Business 401(k) Plan
A 401(k) is a savings vehicle established by a business to help the business owner and employees save for retirement. Employees can defer a portion of their salary into the plan, and many businesses choose to match a portion of the employees’ contributions, helping retirement savings grow even faster.
A 401(k) plan provides all the same tax advantages (tax deductions, tax-deferred earnings, and tax-credits) as the other types of plans, but a 401(k) plan also offers unique benefits:
Higher contributions limits than SEP or SIMPLE IRA plans
Option to make Roth (after-tax) contributions
Option to take a loan from retirement savings
Typically, a broader range of investment options
Case Study
Here is a comparison of the maximum contribution possibilities under a SEP plan, a SIMPLE IRA plan, and a 401(k) plan for a business owner, age 55, with $100,000 of compensation for 2022.
2022 Maximum Contribution
Plan Type
Deferral
Catch-up
Employer
Total
SEP IRA
$0
$0
$25,000
$25,000
SIMPLE IRA
$13,500
$3,000
$3,000
$19,500
Solo 401(k)
$20,500
$6,500
$27,000
$54,000
If you are a small business owner and need a 401(k) plan for yourself and your company, The 401(k)ompany offers access to flat-fee plans plus free professional advice. We will help customize your 401(k) to meet the specific needs of your small business.
Small Business Retirement Plan Comparison Chart*
SEP PLAN
SIMPLE IRA Plan
401(k) PLAN
Key Advantage
Easy to set up and maintain
Salary reduction plan with little administrative work
Permits high level of salary deferrals by employees
Employer eligibility
Any Employer
Any employer with 100 or fewer employees that do not maintain another plan
Any employer other than a state or local unit of government
Maximum annual contribution (per participant)
Employer: up to 25% of compensation but no more than $55,000 for 2018
Employee: $12,500 in 2018; participants age 50 or over can make additional contributions up to $3,000 in 2018
Employer: Must either match employee contributions 100% of first 3% of compensation (can be reduced to as low as 1% in any 2 out of 5 yrs.), or contribute 2% of each eligible employee’s compensation
Employee: $19,000 in 2019; pre-tax or Roth; participants age 50 or over can make additional contributions up to $6,000 in 2018
Employer/Employee combined: Up to the lesser of 100% of compensation or $62,000 for 2019; an employer can deduct all salary deferrals and employer amounts that do not exceed 25% of all participants’ compensation
Minimum employee coverage requirements
Must be offered to all employees who are at least 21 years of age, employed by the employer for three of the last five years and had compensation of $600 for 2018
Must be offered to all employees who have earned an income of at least $5,000 in any prior two years and are reasonably expected to earn at least $5,000 in the current year
Generally, must be offered to all employees at least 21 years old who worked at least 1,000 hours in a previous year
Withdrawals, loans, and payments
Withdrawals permitted anytime; subject to federal income taxes; early withdrawals (generally under age 59½) subject to additional 10% tax; loans not allowed
Withdrawals permitted anytime; subject to federal income taxes; early withdrawals subject to 25% tax within first two years of participation, 10% after that; loans not allowed
Withdrawals permitted after a specified event occurs (e.g., retirement); subject to federal income taxes, early withdrawals subject to 10% tax; plan may permit loans & hardship withdrawals
* Excerpts taken from IRS Publication 3998, Choosing a Retirement Solution for Your Small Business, https://www.irs.gov/pub/irs-pdf/p3998.pdf
Additional resources for Small Business Retirement Plans
© 2019 The 401(k)ompany
200 East Broward Blvd. Suite 1320
Fort Lauderdale, FL 33301
Support: 888.667.4750
© 2019 The 401(k)ompany
200 East Broward Blvd. Suite 1320
Fort Lauderdale, FL 33301
Support: 888.667.4750
© 2022 The 401(k)ompany, All rights reserved.
Securities and Investment Advisory Services offered through A.G.P. / Alliance Global Partners, Member of FINRA | SIPC, a Registered Investment Adviser. Neither A.G.P nor any of its affiliates provide legal, tax or accounting advice.
Investing always involves risk; no investment is protected against loss. Past performance does not indicate future results. Diversification does not ensure a profit or protect against declining markets. Consider your investment objectives before investing.
The A.I.D. Group is not a registered broker-dealer or investment advisory firm. The A.I.D. Group and AGP are independent and not affiliated entities.
Check the background of our investment professionals on FINRA's BrokerCheck
Business Continuity Planning Summary & Disclosure
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP® certification mark, the CERTIFIED FINANCIAL PLANNER™ certification mark, and the CFP® certification mark (with plaque design) logo in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
The CLU® and ChFC(R) marks are the property of The American College, which reserves sole rights to its use, and is used by permission.