Retirement Plans for Businesses
As a business owner, retirement plans can provide a great way for you and your employees to save for retirement while also saving on taxes. Businesses have several retirement plan options to consider for their employees, each with different benefits, tax implications and administrative requirements. Here are some common types of retirement plans and factors to consider when deciding on the best one for your business:
Types of Retirement Plans for Businesses
401(k) Plans
In general, 401(k) plans are one of the most common types of retirement plans implemented by employers. Employee contributions are deducted from their paychecks and contributed to the employee’s 401(k) account. Employers can also choose to match contributions to their employee’s plans, although this is not required. Don’t worry, though, if you have no employees, there is an option for a 401(k) plan for companies with solely an owner-employee or self-employed individuals. The types of 401(k) plans to consider include a Traditional 401(k) plan, a Roth 401(k) plan, or a Solo 401(k) plan. Employee contributions up to $23,500 can be contributed in 2025, plus catch-up for those over 50.
Simplified Employee Pension (SEP) IRA
Primarily for self-employed individuals or small businesses, SEP IRAs allow the employer to contribute to employees’ accounts. Contributions are tax-deductible for the employer and tax-deferred for the employee. SEP IRAs can be used in conjunction with another retirement plan for employees to try and maximize retirement savings. Employers can contribute up to 25% of each qualified employee’s compensation (up to $70,000 for 2025).
SIMPLE IRA (Savings Incentive Match Plan for Employees)
Designed for businesses with 100 or fewer employees, SIMPLE IRAs require the employer to make contributions. These plans are funded by tax-deductible employer contributions and pretax employee contributions. Employees can contribute through salary deferrals, and there is less administration compared to a 401(k) plan. Employers are required to contribute each year either a matching contribution of 3% or a 2% nonelective contribution for each eligible employee. SIMPLE IRAs have lower annual contribution limits than 401(k) plans. The contribution limit for 2025 is $16,500.
Profit-Sharing Plans
The employer can contribute a percentage of profits to employees’ accounts, but contributions are not required annually. These plans are flexible and allow for varying contributions based on company profitability. In order for a business owner to maximize their retirement contributions, they may need to contribute a safe-harbor contribution for employees that may range from 3-5% of employee wages based on nondiscrimination testing. Generally, these plans are used in conjunction with a 401(k) to maximize owner and employee benefits.
Defined Benefit Plans (Pension Plans)
Employers commit to providing a guaranteed monthly benefit in retirement based on a formula. These plans are more common among large organizations and government employers because of the high cost and administrative complexity. While they can provide much larger tax-deductible contributions, defined benefit plans can be very costly, as the company may be required to make additional annual contributions to ensure the plan is not underfunded based on market performance.
Cash Balance Plans
A type of defined benefit plan that acts similarly to a defined contribution plan, offering a set “account balance” to employees. Cash balance plans are often paired with a 401(k) to maximize benefits for owners and employees. Cash balance plans are beneficial for high-earning business owners.
Key Considerations When Choosing a Retirement Plan
Business Size and Structure
Smaller businesses may benefit from SEP IRAs or SIMPLE IRAs due to lower administrative requirements. Larger businesses may consider 401(k) plans (in conjunction with a Profit Sharing Plan) or defined benefit plans.
Employee Participation and Contribution Levels
Is the plan one in which only the employer can contribute, or both employer and employee can contribute?
The minimum and maximum contribution limits for each plan should be considered in choosing the correct plan for your business.
Cost and Administrative Complexity
SIMPLE IRAs and SEP IRAs are generally less costly and have fewer administrative requirements than 401(k)’s, defined benefit, defined contribution, and cash balance plans (which all require some level of administration). Defined benefit and cash balance plans can be expensive to administer and require actuarial services.
Compliance Requirements
Some plans, like traditional 401(k)’s, must undergo IRS nondiscrimination testing to ensure they benefit all employees equally. Safe Harbor 401(k)s can help bypass this testing but may require certain contributions.
Retirement Goals for Owners and Key Employees
Business owners with high income may want to maximize their retirement savings, making plans like defined benefit or cash balance plans attractive because of their higher contribution limits.
Conclusion
Selecting the right retirement plan depends on the company’s size, budget, administrative capabilities, and goals for both the business owner and employees. As your trusted tax advisor, F+H can help ensure the right professionals are involved in selecting, setting up, and administering your plan and that the plan meets both business and employee needs.
