Best Retirement Plans for a Small Business with Employees

retirement plan for small business

Small business ownership encompasses a lot of hard work, which means performing additional planning when it comes to retirement for your employees can feel overwhelming. Small business owners have to make challenging decisions every day, including business strategies, finding funding, and hiring employees. With so much to consider when it comes to business ownership, it’s easy to see why many small business owners forget about the long-term planning associated with retirement. Still, if you want to attract your team’s best talent, then it’s critical to develop retirement plans that will benefit your employees in the future. So, if you haven’t done it yet, then it’s time to figure out what retirement plans you want to offer your employees.

Unfortunately, many small businesses forget the importance of offering retirement plans to employees. For instance, Manta, a company that promotes small businesses, surveyed two thousand small business owners back in 2017. The results demonstrated that over a third of the small business owners surveyed do not offer any retirement plans. Without any retirement planning strategy to offer your employees, it’s unlikely you’ll retain their loyalty and commitment over the long-haul. Offering a decent retirement plan to your employees shows that you care about them and their future, so it’s time to implement a retirement strategy for your workers. 

Even if your business’s size isn’t massive, there are several options you can offer your employees when it comes to retirement plans. Also, you’ll benefit by qualifying for several IRS tax incentives as a small business that offers retirement plans to its employees. These tax benefits can help balance out the cost of paying for your small businesses’ retirement plan. Most plan providers offer affordable, easy choices in retirement plans that work for even the tiniest businesses. Before you decide on the right retirement plan to offer your employees, you’ll need to understand the various available options. You’ll also need to assess your employees’ needs so that you can select plans that will work best for them and something that fits with your small business’s goals and values. 

What are the Tax Benefits of Offering Retirement Plans?

One IRS opportunity is the Retirement Plans Startup Costs Tax Credit which encourages small businesses to provide retirement plans to their employees. As a small business owner, you can use this tax credit to deduct half or $500 of the plan’s initiating cost during the initial three years. 

If you wind up matching or contributing to your employee’s retirement plans, you can also deduct those costs from your taxes. That way, you can also contribute to your retirement plan and use elective deferrals if you want to put yourself in a lower tax bracket. Some small business owners also qualify for the Saver’s Credit, which is based on your income. 

Are Small Businesses Required to Offer Employee Retirement Options?

No, small businesses are not required to offer employee retirement options. There is no law or regulation currently in effect in the United States that mandates small business owners must offer retirement plans to their employees. Still, several businesses offer retirement options along with other benefits to bring in skilled and talented workers. Small businesses can also benefit by providing retirement plans to attract the best talent and reward current workers. 

Offering a retirement plan can increase your employee retention level and be a major factor in attracting highly skilled workers into your business. 

Choosing an Employee Retirement Plan

So, what do you need to think about when selecting a retirement plan for your employees? Keep in mind that it’s a major decision, so you’ll want to discuss your ideas with your financial advisor or accountant to assess what would be best for your employees and your small business. 

If you have employees at your small business, you can opt for a traditional 401(k) plan if you want to create a vesting schedule that should also increase worker retainment at your business. If you have employees that receive a high salary, you can also consider offering a safe harbor 401 (k) plan. If simplicity is a priority, another option would be a SIMPLE IRA, an easy way to get your employees to contribute to their retirement. If you want more control and you’d like to decide when you contribute money to your employees’ retirement plans, a SEP IRA might be a better option. 

Below we’ll cover the best employee retirement plans you can offer in more detail. 


Also called a Savings Incentive Match Plan for Employees, or SIMPLE IRA for short, this plan works for small businesses seeking an easy retirement plan for their employees. SIMPLE IRAs are not only easy to set-up with your employees, but they also require small contributions and low employer matching requirements. With a SIMPLE IRA, your employees could contribute a higher amount than the opportunities offered by either a Roth IRA or a traditional IRA. 

One advantage to SIMPLE IRAs is that they do not require set-up fees, making them attractive for employers and employees. The employee who participates in the SIMPLE IRA must cover the cost of the expense ratios and fund trades. Some SIMPLE IRA plan providers also require a fee to both create and maintain the account.

SIMPLE IRAs also have contribution structures that are easy for employees to comprehend. For example, this type of IRA allows employees to contribute using an elective deferral process. SIMPLE IRAs also do not feature Roth options. SIMPLE IRAs require employers to contribute two percent to each employee plan or match three percent of their worker’s contributions to the IRA. Also, the contributions are fully vested. 

The 2021 contribution limit for a SIMPLE IRA is $13,500 for employees. Employees that are older than fifty can contribute up to $16,500 to the plan. Regardless of what the employee contributes, employers can only contribute their two percent or match the three percent. Also, SIMPLE IRAs have no IRS Form 5500 expectations, nor do they require nondiscrimination testing. These retirement plans work well for small businesses with less than a hundred employees because they are very affordable. 

With a SIMPLE IRA, you can keep the price of funding your employee’s retirement plans down while still offering employee contributions. SIMPLE IRAs have a lower employer contribution and matching rate than a 401(k) plan, meaning this is an inexpensive retirement plan for small businesses. Still, employees can contribute more with a SIMPLE IRA, making this a valid retirement plan option for any small business.

Traditional 401(k)

Traditional 401(k) plans have been around for ages, which is one reason they are so well-known. There are a few differences between 401(k) plans and IRAs. First, with a 401(k) plan, an employee can contribute a greater amount to their retirement plans. Second, employees can also use a 401(k) plan if they need a loan from their retirement accounts. Last, a 401(k) plan gives employees a choice between pre-tax and Roth contributions. 

The cost per employee on a traditional 401(k) plan can vary widely depending on the plan provider. If you want to get the most for your employees, it’s a wonderful idea to find a provider that focuses on small businesses. Most 401(k) plan providers have a price for setting up the account, administrative fees, per-participant costs, and an investment fee. Employees that participate in a 401(k) plan must also pay for fund trades, ETF costs, and mutual fund expenses. 

401(k) plans do not require employee participation, meaning it is optional for them to utilize the retirement plan. Also, employees can make pre-tax contributions if they opt for deferrals or make Roth after-tax contributions.  Employers are not required to contribute to 401(k) plans. Still, if you decide to contribute to your employees’ retirement counts, you can create a vesting schedule so that you can receive a number of your contributions back if a worker departs from your business before the time set on the plan. 

Roth 401(k)s resemble traditional 401(k) plans. However, a Roth 401(k) plan permits employees to contribute after-tax amounts instead of making pre-tax deferrals on their incomes. Some employees prefer Roth 401(k)s because they can make after-tax contributions, meaning they already paid taxes on the money. However, making contributions after-tax doesn’t allow employees to deduct taxes on the money. Still, many employees enjoy this option since they can grow their retirement fund without worrying about the money being taxed once they withdraw from the fund. 

A traditional 401(k)’s 2021 contribution limit stands at $19,500 for employees. If workers are over the age of fifty, they can contribute up to $26,000. Employers are permitted to contribute up to a quarter of the worker’s contribution as long as the contribution’s total amount does not go over $58,000 for workers under fifty. For employees over the age of fifty, the contributions cannot go over $64,5000. Also, a 401(k) plan can undergo nondiscrimination testing, so it may not be an effective retirement plan for employees earning a high income. 

Also, some tax filing is required on this type of requirement plan. Employers need to submit a yearly annual report of their employee benefit plan by completing IRS Form 5500. Still, offering a 401(k) option is an excellent idea for small businesses that want to attract and retain top talent. 

Safe Harbor 401(k)

If you’d prefer a 401(k) plan that won’t undergo a yearly IRS nondiscrimination test, then you may want to consider offering a safe harbor 401(k) option to your employees. So, if you have employees who earn a high salary, this would be a great retirement plan option. With a safe harbor 401(k) plan, your high-earning workers can contribute the maximum amount yearly to their retirement plans. Plus, the funds are fully vested. Still, you’ll be required to match or contribute to these retirement accounts. 

Safe harbor 401(k) plans can vary greatly depending on who your plan provider is. Still, it can be very affordable to offer these all-inclusive plans as a small business. Most safe harbor 401(k) plan providers require a certain amount to set-up the account, charge administrative costs, require an investment fee, and require per-participant fees. Those that participate in the plan also pay for fund trades, mutual fund expenses, and the ETF. 

The contributions structure of a safe harbor 401(k) plan makes contributions optional for employees. Still, the most popular choices for employees are to select Roth contributions or income deferrals. Employer contributions are fully vested, and employers need to match at least four percent of the participants or contribute three percent to their employees. 

The contribution limits for a safe harbor 401(k) plan in 2021 are $19,500 for employees. Employees that are fifty or older can contribute up to $26,000. Employers can contribute up to one-quarter of the employee’s contribution. Still, the total yearly amount contributed cannot go over $58,000. If the employee is aged fifty or older, the total amount cannot be more than $64,500. Also, a safe harbor 401(k) requires an employer to submit IRS Form 5500 every year. 

Safe harbor 401(k) plans are great options for small businesses that have employees with high incomes. With a safe harbor 401(k) plan, these employees can invest a great deal into their retirement and plan better for their futures. 


Another option is the Simplified Employee Pension, also known as the SEP-IRA. A SEP IRA works as an affordable option for employers that also requires simple upkeep. SEP IRAs do not require employers to contribute every year. So, if you’d rather make contributions to your employees’ retirement plans when your business is earning higher profits, this might be the option for you. 

SEP IRAs do not require a set-up fee and require participants to pay for trading commissions and expense ratios. Some plan providers may also charge maintenance fees or may charge you to set-up the account. Employers are the only ones that can contribute to these accounts, and the contribution percentage must stay the same for all active employees. Still, there is no yearly contribution requirement with this type of IRA. 

A SEP IRA’s 2021 contribution limit is about a quarter of the employee’s yearly compensation. Employees cannot make catch-up contributions with a SEP IRA. Employers do not need to file IRS form 5500 or use nondiscrimination testing with this type of IRA. So, if you are looking for something simple to get going and easy to maintain while giving you control over when you make contributions, this might be the best option for your small business. 

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