Choosing a Small Business Retirement Plan That Fits Your Company


Many small business owners want to help their employees save for retirement but cannot manage the cost or complexity associated with pension plans or traditional defined contribution plans, like 401(k) plans. Fortunately, there are three types of retirement plans designed with the small business in mind: the Simplified Employee Pension (SEP) plan, the SIMPLE IRA plan, and the Solo 401(k) plan (sometimes referred to as an “owner-only” or “Individual” 401(k) plan). Each plan has different characteristics and can be used to accomplish different goals but they all have some important things in common as well. They are simple, easy to administer, relatively inexpensive, and can help business owners and their employees reach their retirement savings goals.

SEP plans allow any type of employer to contribute toward their employees’ retirement through a plan that is easy to set up and have almost no administrative costs, no compliance testing, and no government reporting. Each year, the employer may contribute as much as 25 percent of compensation, up to $54,000 (for 2017) for each eligible employee, including the business owners. The employer can choose each year whether to make a contribution and may vary the contribution amount from year to year. This flexibility can be beneficial to a business with uncertain cash flow.

Like a SEP plan, a SIMPLE IRA plan is easy to establish, has no government reporting or compliance testing, and low administrative costs. SIMPLE IRA plans are only available to small businesses, generally 100 or fewer employees. Unlike SEP plans, which are funded exclusively by employers, SIMPLE IRA plans permit both employer and employee contributions. Each year, employees can defer up to $12,500 (for 2017), plus an additional $3,000 (for 2017) catch-up contribution if they are 50 or older. Employers are required to make either a three percent matching contribution or a two percent nonelective contribution for each eligible employee.

A Solo 401(k) plan allows business owners with no employees to maximize their retirement contributions. Each year, business owners can defer up to $18,000 (for 2017), plus a $6,000 catch-up contribution if they are 50 or older. The salary deferrals can be made as either pre-tax or Roth (after tax) contributions. In addition to salary deferrals, business owners can make profit sharing contributions enabling them to contribute up to a total of $54,000 (for 2017), plus the additional $6,000 catch-up contribution. An employer will need to file an annual information return when the plan reaches $250,000 in assets or when the plan is terminated.

To learn more about these three small business retirement plans go to