Pros & Cons of Different Small Business Retirement Plans

As a small business owner, you may want a better retirement plan – one that will let you and your key employees save much more for retirement. 

If the annual contribution limits on standard retirement plans disappoint you, you should know about these alternatives. 

Simplified Employee Pension plans (SEPs). A SEP allows your business to set up and fund IRAs for your workers as well as for yourself. The employer makes 100% of the plan contributions, and the money contributed is tax deductible. The annual contribution limit is $55,000 in 2018. You can contribute up to 25% of your gross yearly income or 20% of your net adjusted annual self-employment income, whichever is less.1

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SIMPLE IRAs & SIMPLE 401(k)s. These plans are funded with mandatory employer and optional employee contributions. They appeal to small business owners who don’t want to deal with complicated plan administration or non-discrimination tests. In 2018, the maximum pre-tax employee contribution to a SIMPLE 401(k) or SIMPLE IRA is $12,500; $15,500, if you are 50 or older. The business owner must make matching contributions in one of two ways: a dollar-for-dollar match of up to 3% of a worker’s  

salary or 2% of a worker’s salary whether the employee contributes to the plan or not, up to a cap of $5,500. SIMPLE plans are limited to businesses with 100 employees or fewer.2,3   

Safe Harbor 401(k) plans. An owner-operator can avoid the complex non-discrimination tests that come with a traditional 401(k) with these plans, which combine features of a traditional 401(k) and a SIMPLE IRA. In a Safe Harbor 401(k) plan, an employer may match worker contributions in one of three ways: a) match 100% of the first 3% of worker compensation, then 50% of the next 2% of compensation; b) match 100% of the first 4% of compensation; c) contribute 3% of worker compensation to the accounts of all eligible employees.4 

DB(k)s. These retirement savings vehicles marry aspects of a defined benefit pension plan to a 401(k). You and your employees contribute to the 401(k) component through salary deferrals; it is a regular 401(k) plan account with regular rules governing such accounts. Parallel to the 401(k) component, you and other plan participants also have the potential for a small pension-like income stream in the future. The business maintains a cash reserve to facilitate these future payouts, with the pension benefit calculated to be 1-20% of an employee’s average salary while working for the firm.5 

For the smallest businesses, there are: 

Solo 401(k)s. Combine elements of a profit-sharing plan with a 401(k) and you have the Solo 401(k), a retirement savings vehicle designed for sole proprietors with no employees other than their spouses. In 2018, the maximum employee salary deferral contribution is the same as the standard 401(k): $18,500 or $24,500 for those 50 and older. The business of the self-employed individual can also make a profit-sharing contribution to the Solo 401(k); the profit-sharing contribution and the employee contribution may total as much as $55,000 in 2018. The potential limit is $61,000 for a business owner age 50 or older.6                                 

Keogh plans. Sometimes called HR10 plans, these retirement savings vehicles are expressly designed for small businesses. There are two types. In the defined benefit version, you essentially fund your own personal pension plan, eventually resulting in a fixed benefit amount defined by a formula. The maximum annual benefit on a defined benefit plan can be as large as $220,000 in 2018. In the defined contribution version, you set up individual retirement savings accounts for you and your employees, with the amount of the contribution to those accounts specified. The retirement benefit depends on the plan participant’s degree of saving and investment returns.7,8

Did you know you had so many choices? Book a free consultation  to see what the best option for you is.


1 – thebalance.com/sep-ira-contribution-limits-and-deadlines-3859079 [1/31/18]

2 – fool.com/retirement/2017/10/28/2018-simple-ira-limits.aspx [10/28/17]

3 – irs.gov/retirement-plans/choosing-a-retirement-plan-simple-401k-plan [1/6/18]

4 – thebalance.com/what-is-a-safe-harbor-401-k-2894205 [2/15/17]

5 – investopedia.com/ask/answers/060215/what-difference-between-401a-and-401k.asp [2/13/18]

6 – irs.gov/retirement-plans/one-participant-401k-plans [10/25/17]

7 – irs.gov/retirement-plans/retirement-plans-for-self-employed-people [11/14/17]

8 – money-zine.com/financial-planning/retirement/keogh-retirement-plans/ [10/26/17]

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