To select the right retirement plan for your small business, you want to begin with what you want to achieve. For instance, if you have employees (or plan to hire) and want to provide retirement benefits to help with retention, there are multiple plan options besides the 401(k). You’ll want to weigh both the cost as well as administrative responsibilities. If you do not have employees and your goal is to maximize your savings while also reducing taxes, there are several plans to consider depending upon your anticipated retirement date.

Let’s look at a few of the various plans that may make sense for a small business.

Savings Incentive Match Plan for Employees (SIMPLE)

This plan allows the business owner and the employee to each make contributions to a traditional Individual Retirement Account (IRA). The employer must either match employee contributions of 100% of the first 3% of compensation or contribute 2% of each eligible employee’s compensation. As a business owner, you are both the employer and the employee, therefore you have the benefit of making both contributions to yourself. These plans are relatively easy to set up and maintain and are not required to conduct annual compliance testing or submit IRS filings. However, the contribution limits are lower than some other retirement plans. This would be an appropriate plan for a business owner with less than 100 employees that prefers simplicity and less administrative duties.

Simplified Employee Pension (SEP)

This plan only allows the employer to contribute to a traditional IRA. It requires the contributions to the business owner and the employees’ accounts to be proportional, meaning the same percentage of compensation. One unique feature is the contributions can vary each year when your cash flow changes, which may be a good reason to select the SEP IRA. Like SIMPLE IRAs, these plans are easy to establish, and annual compliance testing and IRS filings are not required.

Defined Contribution Profit-Sharing

These type of retirement plans allow the employee and the employer to contribute to the employee’s individual accounts, the most common of which is the 401(k). They are highly customizable, meaning there are different contribution features (safe harbor, Roth, automatic enrollment, profit-sharing, or discretionary match). They also do not require employer contributions every year, but there must be a “substantial and recurring” contribution within three of the last five years.

Traditional 401(k)

A traditional Section 401(k) plan is something you may be more familiar with, particularly if you have been an employee for a company. This plan can help you build more wealth given higher contribution limits than a SIMPLE IRA. You also can contribute more to key employees with the benefit of adding a profit-sharing component. In addition, a vesting schedule can help to retain talent.

One thing to bear in mind is that they require more of a commitment from the small business owner as they assume a plan sponsor role, which is a fiduciary responsibility to ensure the plan meets standards for qualified retirement plans as required by the Employee Retirement Income Security Act (ERISA). When evaluating 401(k) providers, it’s important to understand the costs as they may charge direct and/or indirect fees for delivering plan administration services such as asset custody, participant recordkeeping, Third-Party Administration (TPA), and professional investment advice. As much as 75% of small business owners pay plan fees of which they are unaware, so be sure to get clear about them.

Safe Harbor 401(k)

This plan is popular with small business owners as they automatically pass the ERISA testing due to mandatory employer contributions. To achieve safe harbor status, a small business must make a qualifying nonelective contribution or a match to plan participants. Employee contributions and employer profit-sharing contributions are allowed. A safe harbor 401(k) would be appropriate if you have highly compensated employees and want to provide them with the opportunity to maximize retirement savings if you are committed to making the employer match.


If you’re self-employed or it’s just you and your spouse working in the business, then a Solo or Individual 401(k) might be a good choice. These plans offer the same benefits as a traditional 401(k) but allow you to save more than SIMPLE plans.

Cash Balance Plan

If a small business owner has not saved much while building their business and is over age 50, as well as having strong profits and steady cash flow, then a Cash Balance Plan might be worth considering. This more popular form of defined benefit plan allows you to make significant tax-deductible contributions exceeding those permitted in a profit-sharing or 401(k) plan. Combining a cash balance plan and 401(k) with profit-sharing is a great way to accelerate a business owners’ retirement savings. Each employee is required to receive a cash balance credit, however the owners receive the largest percentage. And you get a hefty tax deduction as the bulk of it goes into your retirement account instead of paying it to the IRS.