According to the U.S. Small Business Administration, small businesses employ a significant share of private-sector workers in the United States. However, many small businesses do not offer their employees retirement savings benefits.
If you’re like many other small business owners in the United States, you may be considering the various retirement plan options available for your company. Employer-sponsored retirement plans are an important component of retirement savings and can also help attract and retain the high-quality employees you need to compete in today’s business environment.
Besides helping employees save for the future, establishing a retirement plan can provide benefits to you as an employer and help you make the most of your business’s resources. Potential benefits include:
- Tax-deferred growth on earnings within the plan.
- Potential current tax savings on eligible contributions.
- Tax deductions for qualifying employer contributions.
- Retirement benefits that may be relatively easy to establish and maintain.
- A valuable employee benefit that can help attract and retain staff.
Table of Contents
- Types of Retirement Plans
- SIMPLE: Savings Incentive Match Plan for Employees
- SEP: Simplified Employee Pension Plan
- 401(k) Plans
- Profit-Sharing Plans
- Your Goals for a Retirement Plan
- Getting Professional Guidance
Types of Retirement Plans
Most private-sector retirement plans fall into two broad categories: defined benefit plans and defined contribution plans.
Defined Benefit Plans
Defined benefit plans are designed to provide participants with a specified retirement benefit. These plans can allow eligible participants to accumulate substantial retirement benefits over time.
The employer’s required contribution is generally determined actuarially each year, based on factors such as participants’ ages, years of employment, promised retirement benefits, and the value of plan assets. Contributions are generally required annually and may vary considerably.
Defined Contribution Plans
A defined contribution plan does not promise a specific retirement benefit. Instead, the employer, employee, or both contribute to individual participant accounts under the plan. Contributions may be based on a set percentage of compensation or another formula established by the plan.
A 401(k) plan is one example of a defined contribution plan. Other types include profit-sharing plans, money purchase plans, and employee stock ownership plans.
Small businesses may choose a defined benefit plan or an appropriate defined contribution plan. Financial institutions and retirement-plan providers may offer pre-designed plans, sometimes known as prototype plans, that are intended to meet applicable Internal Revenue Service (IRS) requirements.
When a retirement plan meets the applicable tax-law requirements, it may qualify for important tax advantages, including:
- Investment earnings within the plan generally grow tax-deferred or receive other favorable tax treatment, depending on the plan.
- Employers may qualify for current tax deductions for eligible plan contributions.
- Participants generally pay income tax on tax-deferred contributions and earnings when distributions are made, subject to the rules applicable to the plan.
- Certain distributions or benefits may qualify for special tax treatment under specific circumstances.
Retirement plans have important tax, business, and administrative implications for employers and employees. The rules vary by plan type, so consult your accountant or financial advisor before establishing a plan.
Here is an overview of several retirement plans that may help small businesses and their employees save for retirement.
SIMPLE: Savings Incentive Match Plan for Employees
A Savings Incentive Match Plan for Employees (SIMPLE IRA) allows eligible employees to contribute a portion of their salaries through payroll deductions. Employers generally make either matching contributions or a prescribed contribution for eligible employees, according to the plan’s rules.
For reference, the employee contribution limit for a standard SIMPLE IRA was $16,500 in 2025, compared with $16,000 in 2024. Employees aged 50 or older could generally make an additional catch-up contribution of $3,500 in 2025.
Beginning in 2025, eligible participants aged 60, 61, 62, or 63 could qualify for a higher catch-up contribution limit of $5,250 under the applicable rules. These figures are historical limits for 2025; confirm the current IRS limits before making contribution decisions.
Employers generally choose between the applicable matching contribution arrangement—often matching employee contributions dollar for dollar up to a specified percentage of compensation—and a prescribed nonelective contribution for eligible employees. The requirements depend on the plan and applicable law.
SIMPLE IRAs are designed to be relatively straightforward to establish and administer. Financial institutions can often assist with account administration and paperwork. Employers may arrange for contributions to be sent to a selected financial institution or, where permitted, allow employees to choose their financial institutions.
Employees are generally fully vested in SIMPLE IRA contributions, control the investment choices available within their accounts, and retain their accounts when they change jobs.
SEP: Simplified Employee Pension Plan
A Simplified Employee Pension (SEP) plan allows an employer to establish SEP individual retirement accounts (SEP IRAs) for eligible employees and for the business owner, where applicable.
Employers make contributions according to a uniform allocation formula for eligible employees. Contributions are subject to IRS limits and eligibility requirements.
For reference, the maximum SEP contribution for 2025 was generally the lesser of 25% of eligible compensation or $70,000, subject to the applicable compensation and self-employment calculation rules. The corresponding maximum for 2024 was $69,000. These are historical limits and should not be treated as current without verification.
SEP plans can be suitable for many types of businesses, including self-employed individuals. They generally have relatively low start-up and operating costs and can be simpler to administer than some other employer-sponsored plans.
Employers also have flexibility in deciding whether to contribute in a particular year, subject to the plan’s terms and applicable legal requirements. This flexibility can be helpful when business income fluctuates.
401(k) Plans
401(k) plans are widely used retirement savings arrangements that allow employees to contribute part of their compensation toward retirement. Traditional 401(k) contributions are generally deducted from pay before federal income tax, subject to applicable rules, allowing eligible contributions and investment earnings to grow tax-deferred.
For reference, the employee elective deferral limit for most 401(k) plans was $23,500 in 2025, compared with $23,000 in 2024. Employees aged 50 or older could generally make an additional catch-up contribution of $7,500 in 2025.
Under the enhanced catch-up rules effective in 2025, eligible participants aged 60 through 63 could generally contribute up to $11,250 as a catch-up contribution instead of the standard catch-up limit. Eligibility and implementation depend on the applicable rules and plan provisions. Confirm current limits with the IRS or your plan administrator.
Employers may also choose to match a portion of employees’ contributions or make other employer contributions. These contributions can help encourage participation and increase employees’ retirement savings.
Although 401(k) plans may involve more administration and compliance responsibilities than SIMPLE IRAs, they generally provide higher employee contribution limits and may offer greater flexibility in plan design.
Profit-Sharing Plans
Profit-sharing plans allow employers to contribute to employees’ retirement accounts independently of the amounts employees choose to contribute themselves. These plans can be useful for businesses whose profits vary from year to year.
Depending on the plan’s design and applicable requirements, employers may have flexibility in determining contribution amounts and can include provisions relating to service requirements, vesting schedules, and plan loans. These features are governed by the plan document and applicable law.
For reference, the overall annual additions limit for many defined contribution plans was generally the lesser of 100% of a participant’s compensation or $70,000 for 2025, compared with $69,000 for 2024. This limit is not simply a universal employer profit-sharing contribution limit; the applicable calculation depends on the plan, compensation, and other contributions.
Contribution formulas may vary among eligible employees when permitted by the plan and applicable nondiscrimination rules. A profit-sharing plan may also be combined with a 401(k) arrangement, potentially including employer matching contributions.
Your Goals for a Retirement Plan
Business owners establish retirement plans for different reasons. Before choosing a plan, consider what you want it to accomplish. For example, do you want to:
- Take advantage of available tax benefits and increase your retirement savings?
- Offer competitive employee benefits in addition to—or as part of—a broader compensation strategy?
- Focus primarily on saving for your own retirement?
You may have all three goals. However, small employers often differ in their main priorities.
Some owners primarily want a tax-advantaged retirement savings vehicle that allows them to build their own retirement assets while complying with the rules that apply to employees. Others want a straightforward, relatively low-cost plan that provides retirement benefits to their workforce.
No single retirement plan is best for every business. Each option has different advantages, costs, contribution limits, administrative responsibilities, and eligibility requirements. The best choice depends on your business structure, workforce, financial circumstances, and long-term objectives.
Defining your goals first will help you compare the available plans and select an arrangement that fits your business.
Getting Professional Guidance
If you decide to offer a retirement plan, professional advice can help you evaluate your options. Retirement-plan rules can be complex, and tax treatment, contribution limits, reporting requirements, and employer obligations differ by plan type.
Consult your accountant, financial advisor, or a qualified retirement-plan professional before making a decision. They can help you assess the available choices and identify a plan that supports your business goals while meeting applicable requirements.
Important: This article discusses retirement plans under U.S. law. Contribution limits and other rules can change from year to year. Verify current IRS guidance and obtain professional advice before implementing a plan.
