Sep 26, 2022 4 min read

Choosing the best retirement plan for your small business is important to hiring and keeping the right associates. Offering a retirement plan is a great way for small businesses to attract and retain employees. Retirement plan options also help both employee and small business owners shelter income from taxes while promoting saving for retirement. To accommodate the varied needs of individual small businesses, the tax code offers several types of small business retirement plans. As such, it’s important to compare them against each other to find the best retirement plan for everyone involved.

Simplified Employee Pension Plans (SEP), or SEP IRAs, allow the employee to establish an IRA and the employer to contribute up to 25% of an employee’s compensation each year. There is no employee contribution in an SEP plan. It’s simple, and it’s popular with small family-owned businesses.

Companies with fewer than 100 employees can set up a Simple IRA plan. Each employee opens an IRA account, and both the employer and employee contribute money to it. There is minimal paperwork and no separate administration fees. It’s an efficient way to provide a retirement plan to a large group of people, that is, large by small business standards.

A small business may also open a traditional 401k retirement plan. This plan allows employees to set aside a portion of their salary for retirement on a pre-tax basis.

Designated Roth Contributions are also an available option to provide employees the ability to contribute a portion of their salary on an after-tax basis. Companies offering a 401k need to file paperwork each year to ensure their plan complies with IRS regulations. But still, a traditional 401k plan is a good option for businesses that plan to grow and want flexibility in how much money they contribute on behalf of eligible employees.

There is also a Safe Harbor 401k plan. This type of 401k plan is similar to a traditional 401k plan in many respects. Under a Safe Harbor Plan, the administration is reduced because the plan includes either a matching or an automatic employer contribution that allows all employees to potentially contribute the maximum amount each year to their accounts. Although it is less flexible than a traditional 401k, it may be easier for a small business to operate and comply with IRS regulations.

The last possible choice is an Individual 401k. This 401k plan is for a company that only has an owner(s) and their spouse, if applicable, with no common law employees.

An individual 401k plan may allow the owner(s) to set aside more income than other types of retirement plans.

All of these plans have pros and cons. When choosing which plan may be best for your business you will need to compare the following features. What is the cost of operating the plan and the fees for filling and government forms? Who can contribute to the plan: employer, employee or both? What are the limits of contribution? What are the required contributions? Is there flexibility in contribution? In good years you may want to contribute more, and in bad years you may need to contribute less. Do the plans enable participants access to their money?

Whatever plan you choose always remember as your business changes you may need to change plans. Changing plans is not a sin but one of the many decisions a small business owner needs to think about. Work with your tax adviser and make sure your plan is providing the maximum benefits to you and your employees.

Bob Hollick is a State Farm Insurance agent based in Washington. His column appears every other week in the Observer-Reporter.