Pros and Cons of Retirement Plans Available to Small Businesses (Part 1 of 3)

Unsplash-Stephen LeonardiRetirement plans offer significant tax advantages to small business owners and give both you and your employees a significant incentive to save for the future.

Sound retirement plans can help you with employee retention, as well as attracting new talent to your company as an important facet of your overall benefits package.

There are a broad range of retirement plan product types available to small businesses, each with its own requirements and restrictions. Depending on your company’s size and entity structure, as well as your retirement objectives, you’re faced with identifying which plan offers the greatest number of benefits to you and your employees.

Here are some factors to consider:

  • Contributors—you, your employee, or both
  • Contribution limits—minimum and maximum contribution limits for you and your employees
  • Number of employees and their eligibility to participate
  • Administrative requirements
  • Withdrawal limits and timing
  • Loan provisions
  • Operational considerations—making contributions, managing assets, communicating with participating employees
  • Third party administrator—compliance can require more sophisticated services than you have on staff to meet regulations

This blog isn’t an attempt to give you enough information to make a final decision. But, it will give you a quick overview of the legal and compliance issues related to the available plan types so you are better prepared to discuss them further with you CPA or other financial advisor.

In this first part, we’ll look at two of the most popular plan types:

Simplified Employee Pension (SEP) Plans

Per the IRS: “A SEP plan allows employers to contribute to traditional IRAs (SEP-IRAs) set up for employees. A business of any size, even self-employed, can establish a SEP.”


  • Any number of employees
  • Employer only makes contributions (up to the lesser of 25% of each qualified employee’s compensation or $55,000 for 2018)
  • Contributions tax deductible as a business expense
  • Simple to administer
  • No annual IRS forms
  • Minimal administrative costs


  • Employees can’t defer income
  • Employees immediately 100% vested—so not the best choice in high turnover industries
  • Employer must make same percentage contributions to all employees—including employee owner


Per the IRS: “A SIMPLE IRA plan (Savings Incentive Match PLan for Employees) allows employees and employers to contribute to traditional IRAs set up for employees. It is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan.”


  • Savings incentive match plan for employees
  • Maximum 100 employees who received $5,000 or more in compensation the preceding year
  • Funded by tax-deductible employer contributions and pretax employee contributions.
  • Allows employees to defer income by making salary reduction contributions
  • Employer matches each employee’s salary reduction contribution up to 3% of the employee’s
  • Employer can make a non-elective contribution of 2% of an eligible employee’s compensation (up to $275,000 for 2018), regardless of whether the employee makes a salary reduction contribution


  • Employees immediately 100% vested—so not the best choice in high turnover industries
  • Significant paperwork requirements

In Part Two of this series, we’ll look at 401(k) Plans and Solo 401(k) or Solo Roth 401(k) plans.

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