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How To Choose A Small Business Retirement Plan

Small businesses are vying for talent

Running a small business is a staple of the American economy. Though challenging, being a small business owner can be a rewarding venture that benefits you and the local community.

Today, nearly 58% of America's private workforce finds employment through small businesses. And, with the Great Resignation making the job market more competitive than ever, small business owners are doing whatever they can to attract talent.

Thus, if you are one of these business owners wondering how you can attract top talent, why not consider offering a retirement plan for your employees to help fund their future goals?

Through today's post, I will outline what small business retirement plans exist, their differences, and which type of plans to consider depending on your business structure. So, without further ado, let's dive in!

What types of plans exist?

In the retirement plan world, a niche exists for small businesses. The available plans for these businesses include the Self Employed 401(k), 401(k), SEP-IRA, and SIMPLE IRA.

Plan differences

Self Employed 401(k)

The Self Employed 401(k), or SE-401(k) for short, is tailored to the self-employed small business owner with no employees other than their spouse. The SE-401(k) plan benefits include a high contribution limit of $20,500, plus another $6,500 for those 50 and above. Furthermore, the small business can allocate up to 20% of company net earnings to the 401(k) plan, but not exceeding $61,000 for those under 50 or $67,500 for those above. Notably, these limits are inclusive of the contribution limit.

When saving and investing money in a SE-401(k) plan, contributions can be either pre-tax or Roth and moved into stocks, bonds, mutual funds, and ETFs. Additionally, as with all retirement accounts, any premature withdraws before 59.5 can be subject to the early withdrawal penalty of 10% if an exemption doesn't apply.

Resultantly, for self-employed people who work alone or with their spouse, the SE-401(k) plan can be a lucrative way to save for retirement. It gives you investment and contribution flexibility, plus one of the highest limits for savers. But before settling on this account, we still have three others to discuss.


Likely the most well-known retirement account, the 401(k) Defined Contribution Plan is a standard benefit for employees of larger firms. However, such plans are available to small business owners but can be expensive to utilize.

Unlike SE-401(k) plans, which generally have no fees to open and maintain, traditional 401(k) plans are subject to government reporting, testing, and auditing requirements. Therefore these requirements drive up the costs for companies that employ them.

However, a 401(k) may be worth the cost for employers who want to be competitive, though, since these plans offer employees the ability to save $20,500 a year (or $27,000 for those 50 plus). Such savings opportunities are becoming increasingly important to workers who appreciate the ability to defer taxes on their compensation or take advantage of Roth benefits. Employers can also match employee contributions in various ways and offer profit sharing to sweeten compensation packages further.

Generally, in traditional 401(k) plans, only mutual fund investments are available to employees. However, employees can take loans against their accounts (if the company plan allows for it) and are provided unlimited creditor protection on savings due to government regulations. Notably, early withdrawals are subject to the early withdrawal penalty of 10% if no exemption applies.


Known formally as the Simplified Employee Pension plan, SEP-IRAs are less common in the retirement plan world but still provide value.

Unlike the prior accounts already discussed, only business owners (i.e., employers) contribute to SEP-IRAs. Resultantly, all contributions are before taxes, and if employees want to save their dollars, they must use a different account not offered by the firm.

Despite this limitation, SEP-IRAs offer employees a powerful way to save since employers can contribute up to 25% of gross employee pay as an additional deposit to these accounts. Notably, whatever percentage the employer selects must be the same for all employees, and the gross amount contributed cannot exceed $61,000 per employee.

Generally, SEP-IRAs have minimal fees and can offer various investment options, including stocks, bonds, mutual funds, and ETFs. Further, the early withdrawal penalty of 10% applies to those who do not have an exemption.


The Savings Incentive Match PLan for Employees, or SIMPLE IRA for short, is the final type of employee retirement plan small business owners can consider.

Employees offered a SIMPLE IRA plan can contribute up to $14,000 a year of pre-tax dollars to their account, plus another $3,00 yearly if they are 50 plus. Furthermore, the employer must make a 2% contribution based on gross pay regardless of employee contributions or up to a 3% match if employees contribute. Notably, the firm must employ 100 or fewer employees to be eligible for SIMPLE plans.

As with all prior accounts discussed, the SIMPLE IRA has an early withdrawal penalty of 10% that applies to those who do not have an exemption and withdraw before age 59.5. Additionally, if employees remove contributions within two years of making them, the penalty steps up to 25%.

Finally, SIMPLE IRAs are inexpensive to establish and maintain, making them more palatable than traditional 401(k) plans for larger small businesses who want to give their employees access to mutual funds, ETFs, and a variety of other investments for retirement.

Final Considerations

The various retirement plans we discussed today can be a great way to facilitate employee saving for your small business.

Generally, the SE-401(k) and SEP-IRA will be the most desirable account type for self-employed people that do not have employees other than their spouse.

However, for those with employees that are not their spouses, the SIMPLE IRA and traditional 401(k) are likely to be the most prudent options to facilitate employee saving. Notably, SIMPLE IRAs tend to be more common for smaller firms due to the minimal fees and government reporting requirements. But, that doesn't mean you should ignore a traditional 401(k) altogether.

If you need help choosing a small business retirement plan for your company, be sure to contact us to help you determine the right choice for your firm. We have experience working with various retirement plans and would be happy to evaluate your situation today!

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