Best Retirement Plans For Small Business Owners In United States

A large part of the employed work-force in the United States is deployed in small businesses, making it crucial that easy to implement and comply solutions for retirement planning of employees are available to them. This challenge is achieved by making different plans available, which can be adopted with even one employee, without the prohibitive costs of compliance and administration. Many of these plans revolve around traditional 401(k) or its variants.
Best Retirement Plans for Small Business Owners in United States
Source - Wikimedia Commons (

Small Business Owners Should Facilitate Retirement Planning to Employees

There are several reasons why small business owners should extend retirement planning facilities to their employees. The first and the foremost reason, of course, is the necessity to facilitate retirement planning for their employees, as an essential part of the regular employment, so as to save them from the challenges and constraints of unplanned retirement in an increasingly unstable economic universe. An equally important rationale is that retirement planning facilities enables small businesses to retain precious manpower for longer periods, which adds to the productivity of the business.

Administrative & Compliance Costs

There are

several retirement planning options that can be offered by small businesses to their employees. Such facilities can be offered even for a single employee, without large scale costs of administration and compliance. The number of options available allow the small businesses to choose according to their priorities and preferences.

Tax Advantages

In general, the contributions made by the employer to the retirement plans of the employees are eligible for tax deduction up to the prescribed limits. Most plans provide some tax benefit to the employer. For the employee, the tax benefits are even more, since the tax is deferred till the time they are withdrawn. Moreover, the most significant tax benefit is on the earning on the contributions in the retirement plan, which are tax free. In the long run, with accumulated returns, this can be the most important tax saving achieved by retirement planning.

In addition, the trustee's fees can also be deducted if contributions do not cover them. Lastly, certain additional tax credits are available for small business owners to set up retirement plans, amounting to 50% of the costs to set up of administer certain plans, up to a maximum of $ 500, for the first three years. Lastly, a tax credit for certain low and moderate income individuals who make contributions, known as ‘saver’s credit’ is also available, which amounts to 10% to 50% credit on an amount up to $ 2000, depending upon the participant’s gross income.

Retirement Plan Options for Small Business Owners

The main retirement plans for the small business owners can be classified in four broad categories, the IRA-based plans, the Defined Contribution Plans, the Defined Benefit Plans and the Roth Plan Accounts. Each of them may have further options within it. Earnings on the contributions are generally tax deferred, i.e. not taxed until you receive distributions from the plan.

I.  The IRA Based Plans

These plans are easy to set up and administer, and can be offered even with a single employee. Generally, they do not entail any annual filing return obligation on the part of the employers, thereby minimising costs of setting up and administration. In most plans the contributions get immediately vested and earn returns thereafter. Tax benefits are also available, as usual. Some of these plans are detailed below:

SEP PLAN (Simplified Employee Pension Plan)

A Simplified Employee Pension (SEP) Plan is an individual retirement account for small business owners that can also be used for one or more employees. All contributions are tax deductible as a business expense and can be integrated with social security contributions, and there is no minimum contribution requirement. The maximum contribution under this plan for 2017 is $54,000 or 25% of participant's net compensation, whichever is less, in case of employees. The maximum compensation that can be taken into account for this purpose is $ 270,000 for 2017.

An SEP plan as per the model prescribed by IRS can be easily set up by executing a formal agreement in Form 5305-SEP, in which case no prior approval of IRS, nor any determination letter is required. Part of the costs of setting up the SEP plan can also be claimed as tax credit, as per the details prescribed by IRS in Publication 560.


The SEP plan can be managed as a 'profit sharing plan' where contribution is linked with the annual profits, or it can be 'mandatory annual contribution' in which each year the same contribution will have to be made irrespective of the profit in that year, and the same will have to be extended to all employees who are more than 21 years old and have worked for 1000 hours or more in the last year. The maximum contribution limit for 2017 is 100% of compensation or $54,000, whichever is lesser. The maximum amount that can be deducted by employer in case of all employees is $54,000 or 25% of participant's compensation, whichever is lesser.

The advantage with this option is that it allows the employer to make larger contributions for the employees. It can offer greater flexibility to employer in making contributions, and greater flexibility to employees in taking loans and hardship withdrawals. The terms and conditions of this plan need to be defined, and may require advise of financial institution or employee benefit advisor. Compliance is relative stricter with this plan, and requires annual filing in Form 5500 with the IRS.


This is one of the easiest retirement planning options that can be offered by a small business to its employees, and involves payroll deduction contributions to be made directly to the individual retirement account. No annual filing is necessary on the part of the employer. The maximum limit of employee contribution in 2017 is $ 5500, but an additional catch-up of up to $ 1000 is permitted for those above 50 years of age. It is a relatively flexible option since it can be offered to any employee anytime, without any compulsion, and the employee can decide the payroll deduction subject to the upper limits.

'SIMPLE' PLAN (Savings Incentive Match Plan)

The 'Savings Incentive Match

Plan' or 'SIMPLE' plan is a retirement plan that can be used by small business owners, provided the number of employees is less than 100 and they do not maintain any other plan. These programs are attractive because they don't incur lesser administrative expenses and paperwork compared to plans such as the 401(k). In this plan, the contributions are made in two forms, the Elective Salary Reduction Contribution, and the Matching or Fixed Non-Elective Contribution. The employee contributions are free from tax up to $ 12,500 in 2017. Participants over 50 are allowed a catch up of additional amount that can go up to $3000 in 2017. The employer can contribute a maximum of up to 3% of compensation in case of matching, and 2% of compensation in case of fixed non-elective contribution. In this plan, the employee has greater flexibility in deciding their contribution, whereas the employer needs to match the same as pre the terms of the plan.

II. Defined Contribution Plans

These plans are marked by a defined contribution that can be made by the employee and the employer, and the benefit received after the retirement age depends upon the accumulated contributions and earnings. Various forms of these plans are available, and provide the usual tax benefits available on the contributions made up to the prescribed limits and the earnings. Some of the common types of these plans are listed below. These plans must be offered by the employer to all employees, who are 21 years or older and who worked for at least 1000 hours during a previous year. In case of all of these plans, a minimum amount of employer contribution is required, and the employer must also file annual Form 5500 with the IRS.


The traditional 401(k) plans are also one of the most common options adopted by the small businesses, as apparent from more than 50 million beneficiaries and total assets of over $ four trillion. For each of the employee, a part of the income is transferred into a separate 401(k) individual account, and tax benefits are available on them up to the maximum limit of $18,000 for 2017, with an additional ‘catch-up’ contribution of up to $ 6000 permitted in case of those over 50 years. Various 401(k) plans are available, which also enable contributions by the employer, up to the maximum limit of total contribution, which is $ 54,000 for the year 2017, excluding the catch-up.


The safe harbour 401(k) allows a simpler way of administering the traditional 401(k) benefits to highly compensated employees. Its major advantage for the employer is the relief from annual non-discrimination testing which is required in a traditional 401(k) plan, thereby significantly easing the burden. However, annual filing of Form 5500 is still required. The employees can decide about their contribution, subject to the upper limits, which are the same. The employers can either provide specified matching contributions, or matching contributions up to 3% of compensation to all participants.


These plans are also aimed making things simpler, and are applicable to all employees, with some of the features as those of safe harbour plans. In this plan, the contributions are fixed and the enrolment of employees is automatic, unless they seek to opt out of it. Thus, this plan allows a kind of universal coverage option applicable to all employees by default, while also allowing individual employees some flexibility. The employee contributions are tax deferred as per usual upper limits applicable to 401(k) plans, while the employer contributions are determined by the terms and conditions of the plan and are also subject to limits of 401(k) plans.

III. Defined Benefit Plans

Defined Benefit plans assure a certain benefit after a particular time, and the contribution to them will need to be calculated by an 'actuary'. To that extent they are somewhat complex to operate. The maximum contribution allowable as in 2017, is the amount required to provide an annual benefit of (lesser of) $ 215,000 or maximum compensation of the beneficiary in her highest three consecutive calendar years.

The benefit under the ‘defined benefit plan’ for businesses lie primarily in their ability to contribute more at an earlier stage, which some businesses may prefer. For employees, these plans offer greater certainty. However, it needs to be understood that these plans are more complex compared to the ‘defined contribution’ plan and therefore require higher administrative expenses.

IV. Roth IRA Plans

Roth IRA Plans can be provided in addition to the above categories, to enable employees to make additional contributions with taxed dollars. The major advantage of these plans is that earning on them are not taxed, and the contributions add to the primary plan, thereby raising the retirement cover. In some cases, the 401(k) plans may have an inbuilt feature of additional Roth contribution. In other cases, they can be made available separately.

Please login to comment on this post.
There are no comments yet.
Our Existence Is Sustained By Natural Equilibriums
How To Make The Best Of Your 401 (k) Plan