How to Choose the Right Retirement Plan for Your Small Business

Retirement benefits are no longer optional in today’s competitive job market—they’re essential for attracting and retaining top talent. Whether you’re a small business with just a few employees or a growing company, offering a retirement plan like a 401(k) or SIMPLE IRA can help you stand out as an employer of choice while also providing valuable tax advantages.

This guide will break down the most common retirement plans available to small businesses, explaining the key features, tax benefits, and compliance requirements. We’ll also offer specific examples to help you understand how to choose the best retirement plan based on your company’s size, budget, and employee needs.

Why Your Small Business Should Offer a Retirement Plan

Retirement plans bring benefits beyond financial savings; they strengthen your ability to hire, engage, and keep employees. Consider these advantages:

• Hiring advantage: Offering retirement benefits signals that you care about employee futures. That can help attract talent—especially in tech, SaaS, EdTech, HealthTech startups, and other fast-growing sectors.
• Better retention: Employees who know their retirement is taken care of tend to stay longer. That reduces turnover and minimizes the disruption and expense of frequent hiring and onboarding.
• Tax savings for your business: Employer contributions are generally tax-deductible. In many cases, you can also claim a startup credit of up to $5,000 per year for the first three years after launching a plan.
• Tax benefits for your employees: Contributions come out of an employee’s paycheck before taxes, reducing their taxable income and boosting their savings.

Compare the Main Small Business Retirement Plans

To help you evaluate your options, here’s an in-depth look at the three most common plans: 401(k), SIMPLE IRA, and SEP IRA.

401(k) Plans

Who it fits: Businesses of any size that want flexibility and optional employer matching

How it works: Employees can defer part of their salary into the plan; employers may choose to match. Employer match typically structured as a percentage (e.g., 50% up to 6%).

Key limits (2026 figures):

• Employee contributions up to $24,500 per year
• Catch-up contributions up to $7,500 for age 50+
• Catch-up contributions up to $11,250 for ages 60-63
• In 2026, legislation included in SECURE Act 2.0 requires that individuals with wages exceeding $145,000 in the preceding year (indexed to inflation) must make any catch-up contributions to a Roth-type plan, such as a Roth 401(k).

Tax treatment:

• Employer match is deductible for your business
• Employee contributions reduce taxable wages

Compliance steps:

• Form 5500 must be filed annually
• Nondiscrimination testing ensures fairness across employee income groups

Example:
If you run a marketing agency with ten employees and offer a 50% match up to 5% of salary:
An employee earning $60,000 contributes $3,000; you match $1,500.
That $1,500 is tax-deductible, and the employee saves pre-tax dollars toward retirement.

Best for: Employers who want a customizable and competitive plan and are ready to manage compliance or outsource those tasks

SIMPLE IRA

Who it fits: Businesses with 100 or fewer employees that want a low-administration retirement option

How it works: Both employees and employers contribute, but no complicated reporting is required

Key limits (2024 figures):

• Employee deferral limit: $15,500
• Catch-up for 50+: $3,500

Employer requirement options:

• Match up to 3% of salary (dollar-for-dollar), or
• Make a 2% non-elective contribution for all eligible employees

Tax treatment:

• Employer contributions are deductible
• Employee contributions are pre-tax

Compliance:

• No Form 5500 filing
• No nondiscrimination testing

Example:
At a consulting firm with 20 staff, an employee earning $50,000 contributes 5% ($2,500). You match up to 3%—that’s $1,500.
This setup gives immediate value to the team and straightforward tax savings to your business.

Best for: Businesses seeking an easy-to-administer plan with defined employer obligations and minimal paperwork

SEP IRA

Who it fits: Solo owners, contractors, or small firms where only employer contributions are made

How it works: Employers alone contribute to individual retirement accounts for employees

Key limits (2024 figures):

• Up to 25% of salary or $66,000, whichever is lower

Advantages:

• You decide contribution amount annually—ideal if income fluctuates
• Very low administrative overhead

Tax treatment:

• Employer contributions are deductible
• Funds grow tax-deferred for employees

Compliance:

• No annual filing
• No nondiscrimination testing

Example:
A small architecture studio contributes 15% of salaries to SEP IRAs. An employee earning $80,000 receives $12,000 in contributions.
That amount is deductible, and the employee gains tax-deferred retirement savings.

Best for: Self-employed individuals or small companies who want flexibility and minimal compliance duties

Assessing Tax Benefits

Retirement plans deliver tax advantages on both sides:

• Employer tax deductions: Contributions reduce your business’s taxable income
• Startup tax credit: New plans may qualify for up to $5,000 annually (first three years)
• Employee savings: Pre-tax salary deferrals lower each worker’s taxable income, helping them save more efficiently

Consult a qualified tax advisor for personalized guidance.

Compliance Essentials for Your Retirement Plan

• Reporting and filings: Only 401(k) plans require Form 5500. SIMPLE and SEP IRAs don’t
• Fairness testing: Only applies to 401(k) plans—ensures high earners aren’t favored
• Required notices: Employees must receive clear documentation about their plan, investment fees, and annual summaries
• Fiduciary responsibilities: Plan administrators must act in participants’ interests; advise working with a benefits attorney or specialist to stay compliant with ERISA guidelines

Choosing a Reliable Recordkeeper

Managing a retirement plan’s logistics often involves hiring a recordkeeper. Here’s how to select one that fits:

• Evaluate providers: Look for specialists serving small businesses. Common options include payroll companies, financial firms, and independent administrators
• Review service scope: Ensure they handle plan administration, participant education, compliance testing, filings, reporting, and contribution tracking
• Understand pricing: Fees vary—flat fees or asset-based pricing are common. Compare proposals to find the best balance of cost and service
• Verify expertise: Confirm they have experience with your chosen plan type and can support scalability as your team grows

Matching Plans to Common Scenarios

Scenario	Recommended Plan	Why It Fits
Startup or small team with modest payroll	SEP IRA	Flexible employer-only contributions, minimal admin
Small company (<100 employees), easy setup	SIMPLE IRA	Employee and employer contributions with low yearly paperwork
Growing business (100+ employees or higher payroll)	Traditional 401(k)	More flexibility, higher contribution limits, employee matching options

Questions to Ask When Evaluating Providers

• How are fees structured—per participant, asset-based, or flat?
• What compliance support is included?
• How do you handle participant education, plan documents, and summaries?
• Can you support all plan types we might want in the future?
• What tools or dashboards are provided for employer and employee access?
• Is there flexibility to change contribution amounts each year?

Key Vendor Selection Criteria

• Simple, transparent pricing
• Compliance partnership: Support with filings, testing, and fiduciary paperwork
• Administrative ease: Low-touch setup and management
• Employee support: Clear communications and easy enrollment
• Growth adaptability: Ability to expand services as your company scales

Pitfalls to Avoid

• Hidden fees: Watch for per-participant or investment-related costs
• Mismatched plan size: Don’t overchoose an overly complex plan early on—or under-provision it later when growth arrives
• Compliance gaps: Skipping nondiscrimination testing or not filing required forms can lead to penalties
• Poor communication: Employees must understand contribution options, vesting, and investment choices

Final Thoughts on Choosing the Right Employee Retirement Plan

As your small business grows, offering retirement benefits isn’t just a perk—it becomes central to your talent strategy. Whether you value simplicity (SEP IRA), modest structure (SIMPLE IRA), or full flexibility and customization (401(k)), there’s a solution that fits.

Focus on providers that align with your size and vision, communicate clearly with your team, and plan for the future. Starting with a well-matched retirement plan now makes it easier to grow with confidence later.