A Guide to Retirement Plans for Business Owners
Running a business often means making decisions that impact both your company's finances and your team’s satisfaction. One of the smartest investments you can make? Offering a retirement plan. Not only do these plans help you attract and retain top talent, but they also enhance employee loyalty and satisfaction. And the benefits don’t stop there—retirement plans come with significant tax advantages for both employers and employees.
If you’re wondering where to begin, this guide will walk you through the different types of retirement plans, their pros and cons, and how to choose which one fits your business’s unique needs.
Why Retirement Plans Matter for Your Business
Retention and Loyalty
Offering a competitive retirement plan signals to employees that you care about their future. It builds trust and encourages long-term loyalty, particularly in industries with high turnover rates.
Tax Advantages
Retirement plans often come with significant tax benefits. You, as the employer, may qualify for tax deductions on your contributions, while employees may enjoy the benefit of tax-deferred savings. New businesses may also qualify for tax credits to help offset some of the initial costs of setting up a plan.
Attracting Top Talent
Retirement plans are no longer just a "nice-to-have"; they’re an expectation in today’s competitive job market. Offering a retirement plan can help your business when competing with larger companies for skilled employees.
Now, let's explore the various plans available and how they can work for your business.
Section 1: IRA-Based Plans
IRA-based retirement plans are popular for smaller businesses because they offer simplicity and low administrative costs compared to other options.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
Designed for businesses with 100 or fewer employees, the SIMPLE IRA is straightforward and helps small employers compete with larger firms offering retirement plans.
How it works:
Employers are required to contribute, either by matching employee contributions (up to 3% of their salaries) or as a fixed 2% of total compensation.
2025:
Employee Contribution Limit: $16,500
Companies with 25 or Fewer Employees: The regular deferral limit is increased to $17,600.
Companies with More than 25 Employees: The $17,600 contribution limit is available if the employer agrees to increase its SIMPLE IRA employer contribution beyond the usual requirement. This means matching deferrals up to 4% of pay instead of the usual 3%, or contributing 3% of pay to all eligible employees instead of the usual 2%.
Catch-Up Contribution (Age 50-59 and 64+): Additional $3,500
Companies with 25 or Fewer Employees: The 10% bonus applies, increasing the catch-up limit to $3,850.
Companies with More than 25 Employees: The $3,850 catch-up limit is available if the employer agrees to increase its SIMPLE IRA employer contribution beyond the usual requirement. This means matching deferrals up to 4% of pay instead of the usual 3%, or contributing 3% of pay to all eligible employees instead of the usual 2%.
Special Catch-Up Contribution (Age 60-63): Additional $5,250
Total for Age 50-59 and 64+:
Employee Contribution Limit: $16,500 + $3,500 catch-up = $20,000
Companies with 25 or Fewer Employees: $17,600 + $3,850 catch-up = $21,450
Companies with More than 25 Employees (with increased employer contribution): $17,600 + $3,850 catch-up = $21,450
Total for Age 60-63:
Employee Contribution Limit: $16,500 + $5,250 special catch-up = $21,750
Companies with 25 or Fewer Employees: $17,600 + $5,250 special catch-up = $22,850
Companies with More than 25 Employees (with increased employer contribution): $17,600 + $5,250 special catch-up = $22,850
Pros:
Affordable and simple to set up.
Minimal administrative burden.
Cons:
Lower contribution limits compared to 401(k) plans.
SEP IRA (Simplified Employee Pension)
Ideal for self-employed business owners or employers wanting to contribute only on their end.
How it works:
Employers make contributions on behalf of all eligible employees. Employees cannot make their own contributions.
2025:
Contribution limit increases to $70,000 or 25% of compensation, whichever is less.
Pros:
High contribution limits provide significant savings opportunities.
Minimal paperwork and no annual filings.
Cons:
Employees can’t contribute or receive matching incentives.
Payroll Deduction IRA
A simple, low-cost option for allowing employees to fund their individual IRAs via payroll deduction.
How it works:
Employers set up the payroll mechanism, and employees designate contributions to their own Traditional or Roth IRAs.
Pros:
Virtually no cost to employers.
No required employer contributions.
Cons:
Less competitive as employers don’t directly contribute.
Section 2: Defined Contribution Plans
Defined contribution plans allow employees to contribute a portion of their income to a retirement account, often with optional employer matching. Retirement income depends on individual contributions, investment choices, and market performance, making it less predictable than defined benefit plans but offering greater flexibility and control. Unlike pensions, employees bear the investment risk, but they benefit from portability when changing jobs.
Traditional 401(k) Plans
The most flexible and popular option for businesses.
How it works:
Employees contribute pre-tax dollars via salary deferral. Employers may match contributions or provide additional ones.
2025:
Employee Contribution Limit: $23,500
Catch-Up Contribution (Age 50-59 and 64+): Additional $7,500
Special Catch-Up Contribution (Age 60-63): Additional $11,250
Total for Age 50-59 and 64+: $31,000
Total for Age 60-63: $34,750
Pros:
High contribution limits and flexibility with optional Roth provisions.
Allows loans or hardship withdrawals for employees.
Cons:
Costly to administer due to required compliance testing and reporting.
Safe Harbor 401(k) Plans
Designed to simplify the compliance process while guaranteeing employer contributions.
How it works:
Employers make mandatory contributions that are immediately vested. Contributions can be a match (up to 3-4%) or a non-elective 3% for all eligible employees.
2025:
Employee Contribution Limit: $23,500
Catch-Up Contribution (Age 50-59 and 64+): Additional $7,500
Special Catch-Up Contribution (Age 60-63): Additional $11,250
Total for Age 50-59 and 64+: $31,000
Total for Age 60-63: $34,750
Pros:
High contribution limits and flexibility with optional Roth provisions.
Allows loans or hardship withdrawals for employees.
Automatic compliance with nondiscrimination rules.
Excellent for boosting participation and offering guaranteed benefits to employees.
Cons:
Employer contributions are mandatory and less flexible.
Solo 401(k)/One-Participant 401(k)
Tailored for sole proprietors or business owners with no employees (apart from a spouse).
How it works:
Business owners can contribute as both employer and employee, maximizing their retirement savings.
2025:
Employee Contribution Limit: $23,500
Catch-Up Contribution (Age 50-59 and 64+): Additional $7,500
Special Catch-Up Contribution (Age 60-63): Additional $11,250
Total for Age 50-59 and 64+: $31,000
Total for Age 60-63: $34,750
Pros:
High contribution limits and flexibility with optional Roth provisions.
Allows loans or hardship withdrawals.
Automatic compliance with nondiscrimination rules.
Cons:
Limited to owner-only businesses or with a spouse on payroll.
Section 3: Defined Benefit Plans
Defined benefit plans offer employees a guaranteed retirement income, with the employer fully funding and managing the plan. This section explores two key types: traditional pension plans that promise lifetime income based on considerations like salary and years of service, and cash balance plans, which provide a more portable, account-style benefit. Both options can enhance employee retention, though they come with varying levels of cost and complexity for employers.
Traditional Defined Benefit Plans
Also known as pension plans, these are structured to provide fixed income in retirement based on factors like salary and tenure.
How it works:
Traditional defined benefit plans work by employers funding a retirement plan that guarantees employees a fixed income upon retirement, calculated using a formula based on factors like salary and years of service. The employer bears the investment risk and ensures the plan is adequately funded to meet these obligations.
2025: The maximum annual benefit a retiree can receive is $280,000.
Pros:
Ensure substantial, consistent retirement income for employees.
Excellent for employee retention, particularly long-term staff.
Cons:
Very costly to maintain, with required actuarial assessments.
Cash Balance Plans
A hybrid option combining defined benefit features with a contribution-style format (including portability).
How it works:
Contributions earn interest credits and are professionally managed within a hypothetical account.
2025: The maximum annual benefit a retiree can receive is $280,000.
Pros:
Larger tax-deferred savings potential for both employers and employees.
Predictable retirement outcomes.
Cons:
Requires highly skilled administration and compliance oversight.
Section 4: How to Choose the Right Plan for Your Business
Size and Structure:
Solo entrepreneurs may prefer a SEP or Solo 401(k).
Small teams of 100 or fewer employees might benefit from SIMPLE IRAs or Safe Harbor 401(k)s.
Budget Considerations:
Businesses with limited resources might find SIMPLE IRAs or Payroll Deduction IRAs more feasible.
Those with higher budgets can consider 401(k)s or defined benefit plans to enhance employee benefits.
Retention Goals:
To boost loyalty, plans with matching (e.g., Safe Harbor 401(k)) or guaranteed benefits (defined plans) stand out.
Tax Benefits Priorities:
For businesses seeking maximum deductions, SEP IRAs and Cash Balance Plans can offer significant advantages.
Empower Your Workforce—Start a Plan Today
Offering a retirement plan is more than just a workplace perk—it’s a commitment to the financial well-being of your team. Whether it’s the simplicity of a SIMPLE IRA or the robust offerings of a 401(k), there’s an option tailored to your business’s growth and future.
Strengthen your company culture and secure your employees' futures. Take the first step toward setting up the perfect retirement plan for your business today!