One of the more difficult challenges for small businesses, especially those with less than 5 employees, is finding a cost-effective and manageable retirement plan option. Time spent focusing on a retirement plan is time spent not growing your business. But like healthcare and vacation programs, a retirement plan can help your business recruit and retain top employees.
There are no perfect solutions and every option should be analyzed carefully for how it fits with both your personal and business goals. This piece is meant to help you understand the basics of each option. There are additional details that should be discussed before deciding which plan type is right for your business. Please let us know if you are reviewing your retirement plan choice and we can help in the process.
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Solo/Individual 401(k) Plan |
SEP IRA |
SIMPLE IRA |
Traditional 401(k) Plan |
Ideal Business |
Everyone in the business is either an owner or spouse. Multiple partners may need to agree on company contribution amount. |
Business with employees who are low earners. If the business has employees with significant salaries, this plan may not make sense. |
Small business with several employees; Owners do not have cash flow to save significant amounts ($50,000+) |
Business with several employees; Owners with the cash flow to save a significant amount ($50,000+) |
Key Advantages |
Not aggregated with IRA’s for IRA aggregation rules; Employee contributions add flexibility; Roth savings are allowed. |
Easiest plan to manage; simple calculations |
Cheaper and less administrative burden than a Traditional 401(k) |
Flexibility of employer contributions; vesting schedules can be attached to employer dollars; Roth option; Highest savings limit for owners; Recruiting and retention tool. |
Biggest Disadvantages |
If an employee is hired, this plan becomes significantly more costly if not adjusted. |
Aggregated with other IRA’s for aggregation rules; No Roth option; Amount to employees may be significant depending on salaries |
Low savings limits for Highly Compensated Employees & Owners; No Roth option |
Most costly; Additional administrative tasks; ERISA Compliance testing annually |
Eligibility for Employees |
Business owners & spouses only. |
Must be included if: Age 21+; Worked for business in at least 3 of last 5 years; Received at least $600 in compensation |
Must be included if: Received $5,000+ in compensation during any 2 preceding calendar years and expected to make $5,000+ |
Must be included if: Age 21+; Worked at least 1 year and completed 1,000 hours in that year |
Employer Required Contribution |
N/A |
N/A |
2% Non-Elective* or 3% Match |
None; Typically, a “Safe Harbor” Contribution used to pass some DOL compliance tests |
Employee Savings Max (2020) |
$19,500 |
Not Allowed |
$13,500 |
$19,500 |
Catch-Up Contribution (2020) (Employees > 50 Years Old) |
$6,500 |
N/A |
$3,000 |
$6,500 |
Profit Sharing or Employer Discretionary Contributions |
Yes: Maximum 25% of Compensation; See IRS discussion for self-employed calculations |
Yes: Maximum 25% of Compensation; See IRS discussion for self-employed calculations; Must use same contribution rate for every participant |
Not Allowed |
Yes; Subject to DOL discrimination testing |
Maximum Annual Contribution (2020) |
$57,000 ($63,500 if eligible for catch-up) |
$57,000 |
Sum of employee & employer contributions |
$57,000 ($63,500 if eligible for catch-up) |
Vesting |
Typically, 100% Immediately on all dollars |
100% Immediately on all dollars |
100% Immediately on all dollars |
100% on Safe Harbor and Employee contributions; Non-Safe Harbor and Profit Sharing can be subject to a 6 Year schedule |
IRA Tax Filings |
Form 5500-EZ when plan balance is > $250,000 |
Not Applicable |
Not Applicable |
Form 5500 must be filed annually |
Cost to operate |
Very low cost |
Very low cost |
Low – Account fees typically charged to account holder |
Typically, between $8k-$10k/year depending on service providers |
*2% Non-Elective subject to $285k income limit.
