6 Best Retirement Plans For Small Businesses With Employees

Providing a retirement plan shows employees that you value their future as much as their contributions today. For small businesses looking to attract and retain top talent, a robust retirement benefit delivers both tax advantages for the company and a compelling incentive for staff to build long-term security.

Yet navigating retirement plans can quickly consume time and resources. From ERISA compliance and nondiscrimination testing to contribution limits and annual filings, the administrative burden on small-business owners is substantial—and mistakes can trigger costly penalties.

This article compares the six best retirement plan options for small businesses with employees, outlining each plan’s features, costs, compliance requirements, and ideal use cases. We begin with popular defined contribution choices like 401(k)s and SIMPLE IRAs, then explore discretionary profit-sharing, pension-style defined benefit plans, and pooled solutions such as multiple employer plans. Along the way, we’ll unpack valuable tax credits, clarify key ERISA obligations, highlight factors to consider when choosing a plan, and map out practical next steps for putting your program in place.

1. 401(k) Plans: Flexible Defined Contribution Plans

Among retirement offerings, 401(k) plans are the go-to for small businesses that want high contribution limits, flexible employer matching and a menu of investment options. Employees can defer a portion of their salary on a pre-tax basis (or via a Roth feature where available), and employers can choose a fixed or discretionary match. That combination provides meaningful tax benefits for both sides, but it also introduces added complexity—from annual nondiscrimination testing to ERISA fiduciary duties.

With careful design and professional support, a 401(k) can serve as a cornerstone of your benefits package, helping you attract and retain top talent. Let’s break down how these plans work, what the numbers look like year over year, and which businesses tend to get the most from this powerful defined contribution vehicle.

What is a 401(k) Plan?

A 401(k) plan is an employer-sponsored defined contribution arrangement. Employees authorize payroll deductions—up to an IRS-defined limit—into individual accounts invested in funds selected by the plan sponsor or participants. Employers can add matching or discretionary profit-sharing contributions, further boosting retirement savings.

For example, Small Business XYZ offers its team a 401(k) with three mutual fund options: a total-stock market index, a bond fund and a target-date fund. Employees choose how to allocate their deferrals, and XYZ contributes 50% of the first 4% of each employee’s pay.

Contribution Limits and Catch-Up Contributions

Each year, the IRS sets maximum deferrals and total contribution limits. Below is a side-by-side look at recent limits (for employees under age 50; catch-up applies to those 50+):

Year	Elective Deferral Limit	Catch-Up Limit	Total Contribution Limit1
2022	$20,500	$6,500	$61,000
2023	$22,500	$7,500	$66,000
2024	$23,000	$7,500	$69,000
2025	$23,500	$7,500	$69,000

1. The total limit includes employee deferrals plus employer contributions (matching or profit-sharing).

Scenario examples:

• A 30-year-old defers $23,000 in 2024; their employer matches 4% of pay.
• A 55-year-old adds a $7,500 catch-up on top of the $23,000 limit, potentially reaching $30,500 in personal deferrals.

Employer Matching and Vesting

Employers can structure matches several ways:

• Fixed match: e.g., 50% of employee deferral up to 6% of salary.
• Discretionary match: decide annually, often tied to company performance.

Vesting schedules control when employer contributions become the employee’s property. Common vesting approaches:

• Immediate vesting: contributions belong to the employee right away.
• Graded vesting: typically 20% vest per year over five years.
• Cliff vesting: 100% vests after a set period (often three years).

A well-balanced vesting schedule can encourage loyalty without penalizing employees unduly if they move on.

Compliance Requirements

Maintaining a 401(k) plan carries ERISA fiduciary obligations:

• A 3(16) plan administrator handles plan operations.
• A 3(38) investment manager selects and monitors investments.
• The named fiduciary under ERISA section 402(a) oversees plan governance.

Small businesses must also run annual nondiscrimination tests (ADP/ACP) and file Form 5500 with the Department of Labor. Missing a deadline or failing tests can lead to penalties and corrective distributions. Many sponsors mitigate risk by partnering with a third-party administrator who specializes in retirement plan compliance and fiduciary relief.

Pros and Cons

Pros:

• High deferral and total contribution limits
• Employee choice of investments drives engagement
• Tax-deferral for both employer and employee contributions

Cons:

• Administrative complexity (testing, filings)
• Potential for costly errors without expert support
• Setup and ongoing fees (averaging $2,000–$5,000 annually for small plans)

Who Should Choose a 401(k)?

A 401(k) is best for small businesses that:

• Want to offer a marquee benefit with top-tier contribution limits
• Have the budget to cover professional administration and testing
• Value employee engagement through choice and ownership of investments

If your company is committed to competing for talent with larger firms, and you’re ready to invest in proper setup and fiduciary oversight, a 401(k) plan can be the ideal foundation for your retirement offerings.

2. Simplified Employee Pension (SEP) IRA: Simple Employer-Only Contributions

The SEP IRA is the quintessential low-maintenance retirement vehicle for employers who prefer to shoulder the entire contribution burden. With a SEP, the employer makes all contributions to individual IRAs set up for each eligible employee, giving business owners maximum flexibility in deciding how much to fund each year—without allowing employees to defer their own pay.

Overview of SEP IRA

A SEP IRA (Simplified Employee Pension Individual Retirement Account) is a retirement plan in which only the employer contributes. Employers establish the plan by completing IRS Form 5305-SEP or adopting a prototype SEP offered by many financial institutions. Once in place, you open a SEP IRA for each qualifying employee. No separate plan document is required beyond the one-page form, and participants direct how their funds are invested within their IRAs.

Contribution Calculation and Limits

Under IRS rules, employers can contribute up to 25% of an employee’s compensation, capped at a maximum of $69,000 in 2024. Contributions must be the same percentage of pay for all eligible employees—there’s no option to vary the rate by individual.

For example, if you decide on a 20% contribution rate and one employee earns $80,000, you’d deposit $16,000 into that employee’s SEP IRA. An owner earning $120,000 would see $24,000 contributed on their behalf. This uniform-percentage requirement ensures fairness, but it also means high earners and rank-and-file staff alike receive identical treatment in terms of percentage of salary.

Eligibility and Employee Participation

When setting up a SEP, employers must include all employees who:

• Are at least age 21
• Have worked for the business in at least three of the past five years
• Received at least $750 in compensation during the current year

Once you adopt the SEP, eligible employees automatically participate. There’s no annual election or enrollment period for staff—they’re in by default, and contributions flow directly into their SEP IRAs.

Administrative Requirements

One of the SEP IRA’s biggest draws is its simplicity. To get started, complete IRS Form 5305-SEP and distribute it to participants. Each employee opens a SEP IRA at the financial institution of their choice (or your selected provider). There’s no annual Form 5500 filing if your plan has fewer than 100 participants and you haven’t sponsored any other retirement plans. Ongoing administration typically involves nothing more than notifying employees of the plan and funding the accounts by your corporate tax-filing deadline, including extensions.

Pros and Cons

Pros:

• Employer controls contribution amounts each year, allowing for flexibility in lean or prosperous seasons
• Low setup cost and minimal paperwork
• No nondiscrimination testing or annual filings for small sponsors

Cons:

• Mandatory equal-percentage contributions for all eligible employees, which can be costly if you have many staff
• Employees cannot make salary deferrals, limiting personal savings opportunities
• Failure to notify participants or meet eligibility criteria can jeopardize the plan’s tax benefits

Watch out for the uniformity requirement—every eligible employee must receive the same percentage of pay—and don’t overlook the IRS notification rules when you establish or amend the SEP.

Ideal Use Cases

A SEP IRA shines for business owners who want an easy, affordable way to save substantial sums in good years, without the burden of complex administration. It’s especially well-suited for:

• Owner-only or owner-dominated businesses looking to maximize retirement contributions
• Seasonal or cyclical companies that need discretion over annual funding levels
• Employers seeking a low-cost plan with virtually no ongoing compliance hassles

If you need a straightforward, employer-funded plan that adapts to your cash flow and keeps paperwork to a minimum, the SEP IRA delivers a compelling solution.

3. Savings Incentive Match Plan for Employees (SIMPLE) IRA: Starter Plan for Small Businesses

When your business has fewer than 100 employees and you want a low-cost way to offer retirement savings, a SIMPLE IRA is a go-to option. Unlike a SEP, it allows employees to defer part of their salary, and it still keeps paperwork and compliance manageable. SIMPLE IRAs strike a balance between giving employees skin in the game and keeping administrative overhead to a minimum.

What is a SIMPLE IRA?

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is designed for employers with 100 or fewer employees who earned at least $5,000 in the previous year. Both employees and employers contribute: employees make pre-tax salary deferrals into individual SIMPLE IRAs, and employers either match those deferrals or make a fixed contribution. Because the plan uses IRS Form 5304-SIMPLE or 5305-SIMPLE, there’s no separate trust agreement, and participants choose how to invest their money within approved IRA custodians.

Contribution Limits and Employer Options

For 2024, an employee may defer up to $16,000 of salary; employees age 50 and older can add a catch-up contribution of $3,500. Employers have two contribution methods to choose from each year:

• A dollar-for-dollar match of employee deferrals, capped at 3% of compensation.
• A 2% nonelective contribution to every eligible employee, regardless of whether they defer.

Example: You have five staff members earning $40,000 each. If you match deferrals up to 3%, and all five defer the full amount, your matching cost is 5 × ($40,000 × 3%) = $6,000.

Eligibility Requirements

To participate in a SIMPLE IRA, employees must:

• Have received at least $5,000 in compensation during any two preceding years, and
• Expect to earn at least $5,000 in the current plan year.

Once the plan is adopted, employers must notify eligible employees—typically by October 1—about their right to defer and how the employer will contribute. This annual notice outlines deferral limits, the employer’s matching or nonelective formula, and any plan changes.

Setup and Maintenance

Establishing a SIMPLE IRA is straightforward:

1. Adopt the plan by completing IRS Form 5304-SIMPLE (if employees choose their own financial institution) or Form 5305-SIMPLE (if you designate a single financial institution).
2. Distribute the plan document and enrollment materials to eligible employees.
3. Open a SIMPLE IRA account for each participant at the chosen custodian by the employer’s deadline (October 1 for a current-year plan).
4. Send employee deferrals and employer contributions by the due date of your business tax return, including extensions.

Ongoing maintenance includes sending the required notice each year and depositing contributions in a timely fashion. There’s no Form 5500 filing for SIMPLE IRAs, and nondiscrimination testing doesn’t apply.

Pros and Cons

Pros:

• Low setup and administrative fees
• Employee deferrals encourage personal saving
• No nondiscrimination testing or complex filings

Cons:

• Lower deferral limits than a 401(k)
• Mandatory employer contribution every year, even if business is slow
• No Roth option (deferrals are pre-tax only)

Compared with a basic SEP IRA, a SIMPLE IRA shifts some cost to employees but rewards participation—and it costs only a few hundred dollars a year to maintain.

Best Fit Scenarios

SIMPLE IRAs are ideal for very small businesses that want to offer a retirement benefit without a lot of red tape. If your goals are:

• Encouraging employees to save through payroll deferrals
• Keeping annual costs under $500
• Avoiding ERISA-level complexity

…then a SIMPLE IRA can check all the boxes. It’s a natural stepping stone for growing companies that may transition to a 401(k) once they have the budget and administrative bandwidth to handle a more robust plan.

4. Profit-Sharing Plans: Discretionary Employer Contributions

Profit-sharing plans let employers decide each year how much to contribute based on company performance. Unlike a fixed-match retirement plan, profit-sharing gives you the flexibility to reward employees in profitable years without committing to a set contribution in leaner times. You can offer it as a standalone plan or tuck it into your existing 401(k), combining the appeal of employee deferrals with discretionary employer funding.

Profit-Sharing Plan Basics

A profit-sharing plan is an employer-funded retirement arrangement where annual contributions are tied to corporate results rather than employee elections. You set a contribution formula in the plan document—often as a percentage of compensation—and then decide each year whether to fund it. Contributions go into individual accounts for each participant, where employees direct investments according to your plan’s menu.

You can pair profit-sharing with a 401(k), creating a hybrid plan that allows employees to defer salary while giving you the choice to top off savings based on profitability. This blend drives employee engagement and helps tie rewards directly to company success.

Contribution Limits and Allocation Methods

For 2024, total employer contributions (profit-sharing plus any matching) cannot exceed 25% of each eligible employee’s compensation or $69,000 per person, whichever is lower. You choose an allocation method up front. Common approaches include:

• Pro rata: everyone gets the same percentage of pay.
• Integrated: higher earners receive a larger share, blending Social Security wage base considerations.
• New comparability (cross-tested): different groups (e.g., executives vs. rank-and-file) receive different percentages, based on age or job classification.

Example: A company designates executives in Group A and staff in Group B. In a profitable year, Group A receives a 10% allocation of pay, while Group B gets 5%. This tiered formula allows you to target leadership without exceeding IRS nondiscrimination requirements.

Tax Advantages for Employers and Employees

Employers enjoy a current-year tax deduction for profit-sharing contributions, up to the 25% limit. Contributions reduce taxable income, helping with cash flow planning. For employees, funds grow tax-deferred until distribution, allowing compounding without annual tax drag. When participants retire or leave, distributions are taxed at their ordinary income rate—often lower than their peak working rate.

Plan Flexibility and Administration

One of the biggest draws of profit-sharing is the ability to skip or scale contributions if business dips. You simply follow the plan’s timing rules—usually by your tax-filing deadline, including extensions—and fund the accounts. However, the plan document must clearly outline your allocation formula and distribution rules, and you need to provide a Summary Plan Description (SPD) to participants.

If plan assets exceed $250,000 at year-end, you must file Form 5500 with the Department of Labor. Smaller plans may be exempt, but it’s wise to monitor asset levels and work with a third-party administrator to ensure all notice and filing deadlines are met.

Pros and Cons

Pros:

• Control over the contribution amount each year
• Ties employee rewards to company performance, boosting motivation
• Employer deduction helps with year-end tax planning

Cons:

• Contributions can be unpredictable, making budgeting tricky
• Allocation methods, especially new comparability, can be complex to design
• Requires a detailed plan document and, in some cases, annual Form 5500 filings

Who Benefits Most from Profit-Sharing Plans?

Profit-sharing plans are a strong fit for businesses with variable earnings that want to share success with their team—think professional services firms, tech startups, or manufacturers with seasonal peaks. If your company values the flexibility to dial contributions up or down and seeks a way to reward high performers or leadership groups specifically, a profit-sharing approach may be the right choice.

5. Defined Benefit Plans: Guaranteed Retirement Income

Defined benefit plans promise participants a specified monthly or annual benefit at retirement, calculated by a formula rather than investment performance. Unlike defined contribution plans where employees bear market risk, these pension-style arrangements shift longevity and investment risks to the employer. For businesses and owners seeking predictability and the opportunity for large, deductible contributions, a defined benefit plan can deliver a powerful retirement promise—but it comes with significant funding and administrative responsibilities.

Understanding Defined Benefit Plans

A defined benefit plan guarantees a fixed benefit at retirement, often expressed as a percentage of final average pay multiplied by years of service. Employers must fund the plan to meet future obligations, regardless of market fluctuations. Participants don’t choose investments; instead, the plan sponsor engages an investment manager to generate sufficient returns. The core appeal lies in stability—a reliable income stream for employees and business owners alike.

Benefit and Contribution Limits

The IRS caps the annual benefit and contribution amounts for defined benefit plans:

• Maximum annual benefit: the lesser of 100% of a participant’s final average compensation or $275,000 (for 2024).
• Actuarial calculation: determines the employer’s required contributions each year, based on factors like participant age, service, plan design, and investment return assumptions.

A typical benefit formula might look like:

AnnualBenefit = YearsOfService × FinalAverageSalary × BenefitPercentage

Because contributions adjust to meet the promised benefit, employers in their peak earning years—especially those over age 50—can shelter substantial sums on a tax-deductible basis.

PBGC Premium Requirements

Defined benefit plans are insured by the Pension Benefit Guaranty Corporation (PBGC), which protects participants if a plan terminates without sufficient assets. Sponsors pay two types of premiums:

• Flat-rate premium: $96 per participant for 2024.
• Variable-rate premium (VRP): $52 per $1,000 of unfunded vested benefits, subject to a cap for small plans.

For detailed guidance on these premiums, see the PBGC’s Premium Requirements page.

Funding and Actuarial Responsibilities

Annual funding obligations are determined by an enrolled actuary, who:

• Projects future benefit payments using demographic and economic assumptions.
• Calculates “minimum required contributions” to keep the plan adequately funded.
• Monitors funding levels and advises on corrective actions if shortfalls arise.

Because assumptions (investment returns, mortality rates, salary growth) directly affect contribution levels, employers must maintain consistent funding even during economic downturns. Failing to meet funding requirements can trigger excise taxes and plan restrictions.

Pros and Cons

Pros:

• Predictable, guaranteed retirement income for participants.
• Substantial tax deductions for high-earning sponsors, particularly those nearing retirement age.
• Investment risk rests with the employer, not employees.

Cons:

• Complex administration, with mandatory annual actuarial valuations and PBGC filings.
• Rigid funding requirements can strain cash flow in lean years.
• Higher setup and ongoing professional fees compared to defined contribution plans.

Ideal Candidates for Defined Benefit Plans

Defined benefit plans suit employers who:

• Are age 50 or older and want to maximize tax-deductible retirement contributions.
• Enjoy stable and predictable cash flow to support annual funding commitments.
• Can absorb higher administrative and actuarial costs in exchange for a powerful savings vehicle.

If you’re a small-business owner seeking a pension-style benefit with significant tax advantages—and you’re prepared for the discipline of actuarial funding—a defined benefit plan may be an ideal fit.

6. Multiple Employer Plans (MEPs): Shared Economy of Scale

When small businesses struggle with high per-participant fees and limited administrative bandwidth, a Multiple Employer Plan (MEP) offers a way to pool resources and share the burden. By joining a single retirement plan alongside other, often unrelated, employers, you can tap into lower costs, streamlined compliance and professional oversight—without giving up the core benefits your team expects.

What are MEPs?

A Multiple Employer Plan is one retirement plan maintained by two or more employers. Instead of each company setting up a separate plan, participants across all member organizations share in one pooled arrangement. There are two main flavors:

• Open MEPs: any eligible employer can join, often sponsored by industry associations or professional groups.
• Pooled Employer Plans (PEPs): created under SECURE Act 2.0, these closed arrangements let a designated plan provider serve as the single employer for ERISA purposes.

Both structures centralize plan design, investment selection and fiduciary duties, giving individual businesses relief from many of the headaches that come with running a stand-alone plan.

Cost Savings and Administrative Benefits

By aggregating assets and headcounts, MEPs leverage economies of scale to lower per-person fees:

• Reduced recordkeeping and investment management fees—more assets under management usually translate to volume discounts.
• Shared compliance services and plan administration handled by a single TPA or pooled plan provider.
• Simplified reporting: only the MEP sponsor files Form 5500, rather than each employer.

The result? Smaller companies can offer a robust retirement benefit without hiring dedicated staff or paying steep fixed costs.

Fiduciary Structure and Liability

Under an open MEP, each employer remains a named fiduciary and could face joint liability for plan breaches. PEPs, however, shift most fiduciary responsibilities—such as plan administration (3(16)) and investment management (3(38))—to the pooled provider. This arrangement:

• Minimizes individual employers’ exposure to ERISA claims.
• Ensures professional oversight from a provider experienced in fiduciary compliance.
• Requires clear service agreements and ongoing monitoring of the lead fiduciary.

Before joining, review the plan documents and provider’s fiduciary insurance or bonding arrangements to confirm you’re adequately sheltered.

Eligibility and Enrollment Procedures

Joining a MEP typically involves two straightforward steps:

1. The employer applies through the plan sponsor or provider, certifying compliance with eligibility and nondiscrimination requirements.
2. Eligible employees enroll via a standard, sponsor-provided package—often online—eliminating the need to draft custom plan documents or notices.

Employee eligibility mirrors traditional plans (e.g., age and service requirements), but the sponsor handles annual notices, testing and ongoing amendments, lightening the load for your HR or finance team.

Pros and Cons

Pros:

• Lower per-participant fees through pooled purchasing power
• Centralized compliance, fiduciary management and reporting
• Access to high-quality investment menus and plan design options

Cons:

• Less control over investment choices or plan features
• Open MEPs carry potential joint liability among employers
• PEPs may require a long-term commitment to a single provider

Who Should Consider a MEP?

Multiple Employer Plans are ideal for:

• Very small or startup businesses without in-house retirement expertise
• Trade associations, franchisors or professional groups seeking a turnkey solution
• Organizations prioritizing cost efficiency and fiduciary relief over custom plan features

If your company wants to deliver a competitive retirement benefit but lacks the scale to negotiate low fees or manage complex compliance in-house, a MEP—or Pooled Employer Plan—could be the right path to combine simplicity with economy of scale.

7. Tax Credits and Incentives for Small Business Retirement Plans

Implementing a new retirement plan can strain a small business’s budget—but the federal government offers several tax credits to offset setup and ongoing costs. Taken together, these incentives often cover a significant portion of plan expenses, making it easier to deliver a valuable benefit to your team without stretching cash flow. Below, we outline the primary credits available, eligibility criteria and how to claim them.

Retirement Plans Startup Costs Tax Credit

Small employers can claim a credit for up to three years of ordinary and necessary startup costs incurred when establishing a new SEP IRA, SIMPLE IRA or 401(k) plan. To qualify, you must:

• Employ 100 or fewer employees who each earned at least $5,000 in the preceding year
• Have at least one non-highly compensated employee (NHCE) eligible to participate
• Not have maintained any retirement plan in the past three tax years

The credit rate depends on plan size:

• Employers with 1–50 employees: 100% of the first $500 of startup costs plus $250 multiplied by the number of NHCEs, capped at $5,000
• Employers with 51–100 employees: 50% of startup costs, up to $5,000

Startup costs include fees paid to attorneys, third-party administrators and providers for plan design, document drafting and employee education. To claim this credit, complete IRS Form 8881 and attach it to your business’s income tax return. For details, see the IRS’s Retirement Plans Startup Costs Tax Credit.

Auto-Enrollment Tax Credit

Adding an automatic enrollment feature to your 401(k) or SIMPLE IRA plan not only boosts participation—it also unlocks a separate credit of $500 per year for three years. To be eligible:

• You must meet the same size and non-plan history rules as the startup cost credit
• Your plan must automatically enroll new hires at a minimum deferral rate of 3% (up to a 10% cap) with the option to opt out

This credit reduces your plan’s net cost dollar-for-dollar and is claimed on Form 8881 in the same manner as the startup credit.

Employer Contributions Credit

In addition to covering startup outlays, the SECURE Act introduced a tax credit for employer contributions during the first five years of a new plan. The credit percentage phases down over time:

• Year 1 & 2: 100% of required contributions
• Year 3: 75%
• Year 4: 50%
• Year 5: 25%

This credit applies to any matching or nonelective contributions you make on behalf of employees—up to the statutory limits of your plan type. It can be claimed on your business tax return (typically via Form 8881 or the applicable line for retirement incentives), further reducing the effective cost of funding your plan in its formative years.

Other Relevant Credits

Beyond retirement-specific incentives, small businesses may qualify for additional credits that intersect with workforce and social policy goals:

• Military Spouse Hiring Credit: Employers who hire a qualified military spouse can claim up to $500 per year for three years. Eligibility hinges on employing a spouse of an active-duty service member under permanent change-of-station orders. Claim this credit on IRS Form 5884-C.
• Work Opportunity Tax Credit (WOTC): While not limited to retirement plans, the WOTC rewards hiring from certain target groups (e.g., veterans, SNAP participants) with a credit up to $9,600 per employee. Consult IRS Form 5884 to determine eligibility and credit amounts.

By combining these credits—startup, auto-enroll, employer contributions and workforce incentives—you can offset a large share of plan costs, making a robust retirement benefit financially feasible even for very small businesses. Always consult a tax advisor to ensure you meet the precise requirements and take full advantage of available credits.

8. ERISA Compliance and Reporting Requirements for Small Business Retirement Plans

Offering a retirement plan brings added responsibilities under the Employee Retirement Income Security Act (ERISA). Staying on the right side of ERISA isn’t just about avoiding fines—it’s about protecting both your business and your employees’ retirement security. Below, we cover the key compliance areas every small-business sponsor must know.

Understanding ERISA’s Fiduciary Responsibilities

Under ERISA, anyone with discretionary control over plan management or assets is a fiduciary. That includes:

• A 3(16) Plan Administrator, responsible for day-to-day operations, participant communications and Form 5500 filings.
• A 3(38) Investment Manager, tasked with selecting, monitoring and replacing investment options.
• The ERISA Section 402(a) Named Fiduciary, who bears ultimate authority for plan governance and policy decisions.

Fiduciaries must always act “solely in the interest of plan participants and beneficiaries,” with prudence and loyalty. Breaching these duties—such as by offering imprudent investments or failing to monitor fees—can expose your company to personal liability and DOL enforcement actions. Many sponsors mitigate risk by engaging an experienced TPA or dedicated fiduciary provider to share or assume these responsibilities.

Form 5500 and Annual Filings

Most ERISA-covered plans must file Form 5500 each year with the Department of Labor. Key points:

• Plans with more than 100 participants at the start of the plan year generally file Form 5500; smaller plans may qualify to file the streamlined Form 5500-EZ or Form 5500-SF if they meet certain asset and participation thresholds.
• Deadline: the last day of the seventh month after the plan year ends (e.g., July 31 for calendar-year plans), with a two-and-a-half-month extension available via Form 5558.
• Electronic filing is mandatory through the EFAST2 system; paper filings are no longer accepted.

Failing to file—or filing late—can trigger penalties of up to $2,750 per day (adjusted annually), so it’s critical to track your deadlines and confirm receipt.

Nondiscrimination Testing

To ensure that retirement benefits don’t favor highly compensated employees (HCEs) over rank-and-file staff, ERISA requires:

• ADP (Actual Deferral Percentage) testing for salary-deferral features in 401(k) plans.
• ACP (Actual Contribution Percentage) testing for matching and after-tax contributions.
• SIMPLE IRAs and SEP IRAs are exempt from these tests but must adhere to their own eligibility and contribution rules.

If a 401(k) fails ADP/ACP testing, sponsors can correct by returning excess deferrals to HCEs or making additional contributions for non-HCEs. Addressing a failure promptly (often within two and a half months after plan year end) prevents disqualification of tax benefits and limits corrective-payment penalties.

Plan Document and Amendment Requirements

Every ERISA plan must operate according to a written plan document. Sponsors must:

• Distribute a Summary Plan Description (SPD) to participants within 90 days of enrollment (or 120 days after plan adoption).
• Provide a Summary Annual Report (SAR) within nine months after the plan year ends, or two months after Form 5500 is filed.
• Update plan documents and SPDs for significant law changes—such as SECURE Act provisions on long-term part-time employees—by the statutory amendment deadlines.

Late or missing updates can void plan terms or expose the sponsor to penalties, so it’s best to work with counsel or a TPA to track legislative developments and implement timely amendments.

Penalties for Noncompliance

ERISA violations can carry steep consequences:

• DOL fines for late Form 5500 filings or failure to provide SPDs/SARs can reach $110 per day per participant.
• IRS sanctions for prohibited transactions—such as lending plan assets to a party in interest—can include excise taxes of 15% (or 100% for uncorrected transactions) of the amount involved.
• Participant lawsuits alleging breach of fiduciary duty can result in restitution of losses plus attorneys’ fees.

Common missteps include missing notice deadlines, offering investment options without proper monitoring, or failing to segregate plan assets. A proactive compliance strategy—backed by checklists and professional oversight—goes a long way toward avoiding costly enforcement actions and preserving your retirement plan’s tax‐favored status.

9. Factors to Consider When Choosing a Retirement Plan for Your Small Business

Picking the right retirement program isn’t just about perks—it’s about finding a fit for your people, your pocketbook, and your capacity to manage ongoing obligations. A plan that looks ideal on paper can quickly become a burden if you haven’t weighed factors like budget, staff demographics, and compliance resources. Below are key considerations to guide your decision.

Business Size and Budget

First, take stock of your headcount and cash flow. The number of participants drives both setup and per-person fees—plans with more employees typically achieve lower per-capita costs. Smaller teams (under 25) often gravitate toward SEP IRAs or SIMPLE IRAs to keep expenses under $500 annually, whereas businesses with 50+ employees might justify the higher $2,000–$5,000 annual outlay of a 401(k) or pooled arrangement for the added benefits.

Your budget also determines how generous you can be with employer contributions. Profit-sharing and defined benefit plans let you vary funding if profits fluctuate, but they require you to cover mandated contributions in good and lean years. Map out worst- and best-case scenarios so you know what you can sustain.

Employee Demographics and Participation Goals

Who makes up your workforce? Age, salary levels and average tenure all influence which plan will resonate.

• If your team skews younger, generous deferral limits in a 401(k) can drive higher savings rates.
• In an older workforce, the large deductible thresholds of a defined benefit plan may be more attractive.
• Seasonal or part-time employees might never meet SIMPLE IRA eligibility, making a SEP IRA or MEP a simpler choice.

Estimate likely participation and deferral rates: will employees take advantage of a Roth option, or do they prefer pre-tax deferrals? Running a quick survey or reviewing payroll data can reveal who’s most inclined to enroll and whether automatic enrollment (and its associated tax credits) should be part of the mix.

Administrative Capacity and Resources

Consider your team’s bandwidth for plan maintenance. Do you have an HR or finance employee who can handle the annual Form 5500, nondiscrimination testing, and participant communications? Or would defaulting to a more hands-off solution free up critical time?

Engaging a third-party administrator (TPA) or fiduciary provider brings expertise in ERISA compliance, plan design, and document updates. While that service carries fees, it also shifts liability for testing, filings, and investment monitoring. If internal resources are limited, the peace of mind that comes with a dedicated TPA often outweighs the cost.

Cost Structure and Fee Transparency

Retirement plan expenses come in many forms:

• One-time setup and legal fees
• Recurring recordkeeping and custodial charges (often per participant or asset based)
• Investment-related costs, such as fund expense ratios and advisory fees

Look beyond the headline price. A low setup fee paired with high per-participant charges can quickly erode employee savings. Ask providers for a full fee disclosure that lays out every cost component. Then benchmark those figures against industry averages—typically 0.15%–0.50% of assets for recordkeeping and 0.20%–0.75% for investment management in small plans—to ensure competitive rates.

Tax Impact for Employer and Employees

Retirement plans deliver tax benefits on both sides:

• Employer contributions are usually deductible—up to 25% of compensation for most defined contribution plans, or as actuarially determined for defined benefit plans
• Employee deferrals grow tax-deferred until distribution, reducing current income tax liability
• Roth options convert pre-tax dollars to after-tax contributions, offering tax-free growth and withdrawals if rules are met

Weigh the trade-off between immediate deductions and future tax savings for your staff. If your workforce values tax-free retirement income, a plan with a Roth feature may boost satisfaction. For employers in high-marginal tax brackets, defined benefit plans can be especially advantageous for large, deductible contributions.

Long-Term Flexibility and Scalability

Your retirement plan should evolve alongside your business. Key features to evaluate:

• Loan provisions and hardship withdrawals, which can enhance appeal but add complexity
• Roth vs. pre-tax deferral options and their eligibility rules
• The ease of increasing employer match percentages or adding profit-sharing in prosperous years
• Portability: how simple it is to change providers or migrate to a different plan design as you grow

Look for arrangements that let you start small—say, with a SIMPLE IRA—and upgrade to a 401(k) or MEP without a total plan overhaul. Scalability ensures you won’t outgrow your retirement solution as your headcount and contribution goals expand.

10. Next Steps for Implementing Your Retirement Plan

Now that you’ve explored the top retirement plan options, it’s time to turn insights into action. Implementing a new plan can feel overwhelming, but breaking it into clear stages will keep the process on track and help you launch a program that meets your goals—and stays compliant.

1. Assess your needs. Revisit your business size, budget, employee demographics and long-term goals. Use payroll data and a quick team survey to gauge likely participation and preferred features (Roth vs. pre-tax, loan provisions, auto-enrollment).
2. Compare plan types. Match those requirements against the six plan profiles above. Consider setup costs, ongoing fees, compliance burden and contribution flexibility. If you need tight budget control, a SEP or SIMPLE IRA might fit; if you’re focused on high deferral limits and employee choice, a 401(k) or pooled plan could be the best bet.
3. Project costs and tax credits. Compile a fee estimate—one-time setup plus annual recordkeeping, advisory and investment costs. Factor in the startup credit, auto-enrollment credit and employer contributions credit to offset your net expense.
4. Engage professional support. ERISA compliance, nondiscrimination testing and Form 5500 filings carry real risk if mismanaged. Talk with a third-party administrator or fiduciary specialist who can shoulder those duties, guide plan design and keep you on schedule.
5. Adopt the plan. Select a provider, complete the required plan documents (e.g., IRS forms or a prototype plan), and secure any necessary service agreements. File for any tax credits and, if applicable, establish a trust or IRA accounts for participants.
6. Communicate and launch. Notify your team with a clear enrollment guide, deadlines and contribution instructions. Consider auto-enrollment to jump-start participation rates—and claim the extra $500 credit per year. Schedule one-on-one sessions or group meetings to answer questions and build engagement.

Putting these steps into motion transforms the retirement plan from concept to a valuable benefit that attracts talent and strengthens your corporate culture. For expert guidance and turnkey administration—covering everything from fiduciary relief to participant education—partner with Summit Consulting Group, LLC. Their seasoned team will help you select the right plan design, manage setup and keep you fully compliant. Visit Summit Consulting Group, LLC to get started.