How Do Small Business Retirement Plans Compare?

Top Six Retirement Plans for Small Businesses

If your company is thinking about adding or changing a retirement plan for your employees, there are many different ways to make that happen. Retirement plans keep employees happy and can be an effective way for business owners to save money as well. Here are the ups and downs of the six most popular retirement plans for small businesses.

 1. Safe Harbor 401(k)

As 401(k) plans have gained popularity, many employees expect to have such a plan at their company. Offering a 401(k) can help your business attract and retain talented people.

Employers commonly like the fact that 401(k) plans are largely self-funded from the tax deferred contributions employees make from their earnings. However, a 401(k) can have drawbacks, too. One key issue is the requirement that they don’t discriminate in favor of highly-compensated employees. The Employee Retirement Income Security Act (ERISA) requires several yearly tests to prove that your plan benefits everyone, not just highly-compensated employees. Failing these tests may result in limiting the retirement contributions of owner-employees.

With a safe harbor version of a 401(k), though, the testing requirements can be eliminated. Employers make contributions to employees’ retirement accounts, either through a yearly non-elective contribution or matching contributions throughout the year. By making these contributions, anti-discrimination testing typically isn’t required, and owner-employees can maximize contributions to their own retirement funds if they wish. The downside to such plans is that the required employer contributions can be expensive or cost-prohibitive for smaller companies.

Bottom line: Safe Harbor 401(k) plans appeal to business owners who want to offer a 401(k) retirement plan yet avoid nondiscrimination testing.

2. Solo 401(k)s

Another variety of a 401(k) is available to companies without any common-law employees. If the only people working at the firm are owners, business partners, shareholders, and their spouses, a solo 401(k) can be used. Independent contractors hired by the company, as well as part-time workers who are paid for less than 1,000 hours a year, can be excluded.

Solo 401(k) plans allow business owners and their employed spouses to make relatively large contributions into retirement plans. With a standard 401(k), the 2017 maximum is $18,000 a year, or $24,000 for those 50 or older. Solo 401(k) plans permit both employee and employer contributions, so the maximums this year can be $54,000 or $60,000.

Bottom line: If your company qualifies, these plans can allow you (and your employed spouse) to make substantial retirement plan contributions, even if you don’t have employees.


A SIMPLE IRA (Savings Incentive Match Plan for Employees) allows employees and employers to contribute to traditional IRAs that are set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.

Compared with other retirement plans, SIMPLE IRAs have lower contribution limits than some other plans. And as an employer, you are required to contribute either a percentage of compensation or a matching contribution.

On the positive side, SIMPLE IRAs are designed to be easy on the paperwork. Companies fill out a short form to establish the plan and ensure that IRAs are set up for each employee. To be eligible, your company must have no more than 100 employees and must not sponsor another retirement plan. Going forward, there is no annual filing requirement, and nondiscrimination testing is not necessary. Administrative costs usually are low.

Bottom line: As a business owner, if you want to offer a retirement plan that requires little administration and you are content with the contribution limits to your own account, a SIMPLE IRA can be a viable choice.

4. Profit-Sharing Plans

A profit sharing plan is a type of defined contribution plan that allows you to help employees save for retirement in a different way. The company can decide from year to year how much to contribute (or whether to contribute at all) to an employee’s plan based on profitability. If the company does not have a profit, it does not have to make contributions to the plan.

Profit-sharing plans may help motivate employees. They can give employees a feeling of ownership in the success of the company – when the company does well, their retirement funds grow. As an employer, you can raise or lower annual contributions as you wish or even skip them altogether. Still, companies with profit-sharing plans may peg their contributions to the firm’s results, so employees will learn that their successful efforts will produce tangible rewards.

Profit-sharing plans come in different forms. Some will contribute a certain percentage of compensation to all participants, and other plan designs may skew contributions to certain individuals, according to various formulas.

Bottom line: If your company can afford substantial tax-deductible contributions to employees’ retirement accounts, a well-publicized profit-sharing plan can be a great employee motivator.

5. ESOPs

An Employee Stock Ownership Plan (ESOP) is an employee-owner program that provides your workforce with an ownership interest in your company. In an ESOP, companies provide their employees with stock ownership, often at no upfront cost to the employees.

An ESOP is designed to transfer some or all of company ownership to employees. Shares are transferred to the ESOP, valuations are implemented, and departing participants receive a cash payout equal to the value of the shares allocated to their accounts.

Employees are motivated to see their company do well when they participate in an ESOP. Higher profits generally equal higher share values and a larger buyback when employees retire or change jobs. For business owners, ESOPs may offer tax advantages that go beyond deductible contributions as well as an appealing exit strategy.

ESOPs can be expensive to administer due to the regulatory requirements that come with them. Some companies offer an additional retirement plan because a reliance on an ESOP means a lack of investment diversification.

Bottom line: Adopting an ESOP should not be taken lightly because these plans can be complex, but they may offer an attractive mix of employee appeal, unique tax benefits, and company continuity.

6. Defined Benefit Plans

Traditional pension plans are defined benefit plans. They commit employers to certain contributions each year and to certain payouts to retirees.

Pensions may be too costly to administer and too inflexible for most small companies. Nevertheless, they can appeal to companies whose owners want the largest possible contributions to their own retirement funds. In some circumstances, annual contributions to the owner’s account can reach well into six figures and are tax deductible. Large contributions must be made to the plan to provide a sizable pension to participants.

Bottom line: Defined benefit plans may work well for companies when the owner or owners are planning to retire in 5–10 years. Assuming that there are other employees who are younger and modestly paid, the owners might build up a large pension fund in a few years while relatively few dollars go to fund other employees’ retirements.

Questions? Click here to contact a Carpenter Evert tax expert for help navigating the different plans. Or call us at (952)831-0085.

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