Small Business Guide to Retirement Plans

Offering a retirement plan to employees used to be viewed as a great way to incentivize new talent and retain current employees, but this feature has now shifted to a fundamental requirement in order to remain competitive within their industry.

This pivotal shift highlights the importance of a retirement plan in attracting, motivating, and retaining a skilled and committed workforce. Organizations that fail to offer robust retirement options may struggle to meet the evolving expectations of employees.

There are multiple routes that can be taken, with different retirement plan structures and further customization of them, which is why it is crucial to have a comprehensive understanding of all available options.

 The Five Types of Retirement Plans Available for Small Business Owners

	Traditional 401(K)	Safe Harbor 401(K)	Solo 401(K)	SIMPLE IRA	SEP IRA
Profit Sharing Option	X	X	X
Tax-Free Growth	X	X	X	X	X
Employer Match	X	X	X	X	X
Employee Contribution	X	X	X	X
ERISA Regulations	X	X	X		X
Excluded from Non-discrimination testing		X	X	X
Option available for 2 to 100 employees	X	X		X	X
Option available for over 100 employees	X	X
Loan Option	X	X	X
Immediate Vesting Schedule		X		X	X
5500 Filing Required When Criteria Met	X	X	X (when assets above $250,000)
Audit Required When Criteria Met	X	X	X	X	X

Traditional 401(k) Group Retirement Plan Overview

A 401(k) Plan is a type of retirement savings plan where employees contribute money from their paycheck into an investment account. In a traditional 401(k), the contribution is taken from the paycheck before taxes are taken out.

The account can be invested in the market and will grow tax-free until retirement. The company may or may not provide a match to the employee.

Safe Harbor 401(k) Group Retirement Plan Overview

A safe harbor 401(k) is a good option for a company with highly compensated employees, defined as:

• Received more than $155,000 in compensation in 2024 and $160,000 in 2025.
• Own more than 5% of the business at any time during the year

A Safe Harbor plan is not subject to nondiscrimination testing, allowing maximum contributions into retirement accounts.

Individual or Solo 401(k) Retirement Plan Overview

A Solo 401(k) is a retirement plan designed for a business with no employees. The plan is funded by employee salary deferrals and employer contributions.

SIMPLE IRA Group Retirement Plan Overview

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is used by businesses with less than 100 employees who do not want the cumbersome responsibilities or costs of a 401(k) plan.

Employers must contribute for each employee, but administration costs fall to the Individual Retirement Account holder.

SEP IRA Group Retirement Plan Overview

A Simplified Employee Pension plan (SEP) IRA works similarly to a SIMPLE IRA, but there is no option for an employee contribution.

The only contributions come from the sponsoring employer.

What Are the Eligibility Requirements for Retirement Plans?

A 401(k) Plan can be used by a business of any size, including but not limited to:

• Limited Liability Company
• Sole Proprietor
• Corporation
• Partnership 

The limitation is with a Solo 401(k), the only eligible plan participants are the owner and their spouse, both of whom are employed by the business.

If the business has any non-owner employees, the business is not eligible for a solo 401(k) and would have to establish a traditional or safe harbor 401(k), a SIMPLE IRA, or a SEP IRA.

What Are the Key Features of a Traditional 401(k)?

What is a Traditional 401(K)?

A traditional 401(k) plan is a deferred compensation plan that allows employees and the employer to contribute to a retirement vehicle via paycheck.

What are the Advantages of a 401(k)?

The advantages of a traditional 401(k) include incentivizing employees to remain at the company and potential tax credits for starting the plan.

What are the Disadvantages of a 401(K)?

The disadvantages of a traditional 401(k) include the cost of administering the plan and the added fiduciary responsibility that the plan sponsor will have.

What is the Contribution Limit for a 401(K)?

In a traditional 401(k), an employee can contribute pretax dollars from their paycheck. The employer has the option to match their contributions to help employees save for retirement.

In addition to a match, a company can also offer a profit-sharing contribution. This is a discretionary contribution, meaning the company can decide on a yearly basis if it will make the contribution.

Contribution limits for a 401(k) are $23,000 for employees in 2024 and $23,500 in 2025.

A traditional 401(k) may also have the option for a Roth contribution. A Roth contribution allows for after-tax contributions, paying the taxes when it is contributed and then not taxed at withdrawal. Roth contributions are not tax deductible.

What is the Vesting Schedule for a 401(K)?

A 401(k) will have a vesting schedule, which dictates how long the employee must work for the company before employer contributions are fully owned by the participant. Most plans follow a graded or cliff vesting schedule.

Who Administers a 401(K)?

Given the various factors involved with a 401(k), it is common to have three parties operating the plan, a Recordkeeper, an investment advisor, and a TPA.

The recordkeeper will keep track of investments, contributions, customer support, and other plan management.

The investment advisor is a fiduciary in the plan who will select and monitor investment options, enroll participants in the plan, and monitor the plan’s expenses.

401(k) administration can be a cumbersome task due to non-discrimination testing. This requires the company to use the services of a Third-Party Administrator (TPA) to monitor the plan and complete all necessary testing.

What are the Key Features of a Safe Harbor 401(k)?

What is a Safe Harbor 401(K)?

A safe harbor 401(k) is an extension of the traditional 401(k). It defines specific employer contributions for participants, eliminating some of the year-end testing requirements.

What are the Advantages of a Safe Harbor 401(K)?

Given the required contributions in the plan, a safe harbor plan automatically satisfies certain compliance testing requirements, eliminating some of the year-end testing traditionally required.

Additionally, a safe harbor plan allows businesses to deduct employer-matching contributions from their taxes

Business owners are also able to maximize their contributions to their own 401(k) account.

What are the Disadvantages of a Safe Harbor 401(K)?

With a safe harbor 401(k), employers are required to contribute on behalf of the employees, which raises the payroll costs. The same added fiduciary liability that is present in a traditional 401(k) is present in a safe harbor 401(k).

What are the Contribution Limits of a Safe Harbor 401(K)?

A safe harbor 401(k) is a version of a 401(k) plan that allows for maximum contributions to a retirement account. The structure of the plan mandates employer contributions and allows for optional employee contributions. The employer is required to contribute:

• Basic Match: a matching contribution of 100% on the first 3% of deferred compensation, and a 50% match on the next 2% deferred.
• Enhanced Match: a matching contribution of 4% to all participating employees
• Non-elective: Contribution of 3% or more to all employees

All contributions to the plan are 100% vested, meaning the employee has full ownership over the assets.

The structure of the plan is similar to the traditional 401(k), with the use of a third-party administrator, recordkeeper, and investment advisor.

The safe harbor 401(k) plan can be a great option for companies looking to maximize retirement contributions without causing issues with annual IRS nondiscrimination testing.

What are the Key Features of a Solo 401(k)?

What is a Solo 401(K)?

A solo 401(k) is similar to a 401(k) retirement plan in structure but designed for a business owner with no employees.

What are the Advantages of a Solo 401(K)?

The biggest advantage of the Solo 401(k) is that it allows for a high contribution limit each plan year. Another advantage is a larger selection of investment options compared to a group retirement plan.

In addition to maximizing retirement savings, a Solo 401(k) also:

• Larger contribution limits with a maximum of $69,000 (or $76,500 if over 50) in 2024
• Discrimination testing is non-applicable therefore not required
• Annual From 5500 filing is not always necessary, it is dependent on the plan balance
  • As long as the total value of the plan is under $250,000, filing a Form 5500 is not required
• Loans can be permitted, allowing the owners to borrow from the plan

These advantages create a 401(k) plan that is easier to administer and provides additional benefits from a standard 401(k) plan.

What are the Disadvantages of a Solo 401(K)?

One disadvantage is that if the business owner decides to expand the company and add employees, the solo 401(k) will no longer suit the business, and will require a traditional 401(k).

A solo 401(k) is designed for a business owner with no full-time employees. Under the plan, a business owner and spouse can participate.

What is the Contribution Limit for a Solo 401(K)?

Contributions work like they do for a standard 401(k) plan, with the employee (business owner) and company making contributions to the plan.

Contribution limits are capped at $66,000 in 2023, but if the participant is over 50, they can contribute an additional $7.500.

The owner will have the choice between traditional or Roth contributions,

If a business has plans to grow and hire new employees, a Solo 401(k) is not suitable, because adding an employee would make the retirement plan ineligible.

If the business is set up as a sole proprietorship or a partnership, profit-sharing calculations can be cumbersome. It is important to speak to a Third-Party Administrator to ensure contributions are calculated properly.

What are the Key Features of a SIMPLE IRA?

What is a SIMPLE IRA?

A SIMPLE IRA is a lower-cost option to the 401(k) plan, allowing for mandatory employer and employee contributions

What are the Advantages of a SIMPLE IRA?

The advantages of a SIMPLE IRA are minimal administrative management and lower setup and maintenance costs.

What are the Disadvantages of a SIMPLE IRA?

Disadvantages of a SIMPLE IRA include a mandatory employer contribution and lower contribution limits than a 401(k).

If the business has plans to hire employees, a Savings Incentive Match Plan for Employees (SIMPLE) IRA may be a great low-cost solution. The SIMPLE IRA is available to companies with less than 101 employees.

What are the Contribution Limits of a SIMPLE IRA?

Employers are required to contribute either:

• Up to three percent matching contribution
• A flat two percent non-elective contribution

A SIMPLE IRA may also have a Roth contribution option, allowing employees to receive tax free withdrawals in retirement.

Additionally, contribution rates are much higher for this plan than the traditional IRA. In 2023 an employee may contribute up to $15,500.

What are the Vesting Periods of a SIMPLE IRA?

Employer contributions are 100% vested immediately, meaning the employee has ownership of their retirement account.

The employer is still capped at how much they can contribute, providing the opportunity to save much more than what the company will give. This creates a plan that is especially good for employees with the drive to save for retirement.

The costs associated with a SIMPLE IRA are paid from the individual participant accounts. This is different from a 401(k), where costs are typically deducted from plan assets.

Before selecting a SIMPLE IRA product, it is important to review the fees and investment options to ensure it is the best fit for a business.

Product fees and available investment options will vary by provider, some providers may only offer their proprietary funds, which can hinder asset diversification.

There is no allowance for loans in a SIMPLE IRA.

With low costs of operation and simplicity, a SIMPLE IRA is a good solution for a company that wants to incentivize retirement planning but is not ready for the expenses associated with a 401(k).

What are the Key Features of a SEP IRA?

What is a SEP IRA?

A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a retirement plan that an employer can establish, and works like an IRA with higher contribution limits.

What are the Advantages of a SEP IRA

Advantages of a SEP IRA are that it is relatively easy to administer and set up, contributions are tax deductible, and there is not a requirement for yearly contributions.

What are the Disadvantages of a SEP IRA?

Disadvantages of a SEP IRA are that not all businesses are eligible to administer a SEP IRA, there is no catch-up contribution for those over 50 years old, and there must be an equivalent contribution (by percentage of salary) for each participant employee.

What are the Contribution Limits of a SEP IRA?

A Simplified Employee Pension (SEP) IRA is a retirement plan set up like a SIMPLE IRA, however, only the employer may make contributions for the participants. All contributions must be an equal percentage of compensation to mitigate any discrimination.

In addition to an employer-only contribution, the contributions are not required annually. This creates flexibility for the employer by allowing for contributions only when profits allow.

One downside to the SEP IRA is that it offers no Roth or catch-up contributions.

SEP IRA plan administration is a lower-cost option that is relatively straightforward to establish and maintain.

Tax Benefits for Start-up Retirement Plans

Retirement plans not only help with employee retention and retirement savings; they can also offer tax credits to offset the cost of plan operation.

Companies with less than 101 employees are eligible for a tax credit for the first three years of starting a retirement plan. There is a separate tax credit for plan costs and employer contributions to the employees.

One additional tax benefit is if contributions are made pre-tax, it will reduce the taxable salary of the employee by the contribution amount.

How Do I Set Up a 401(k) Plan for My Small Business?

Once selecting a plan design that matches the needs, size, and budget, it is time to find a service team to assist in establishing and administering the plan

When setting up a plan, there are three main parties you will work with:

• 401(k) Recordkeeper
• Financial Advisor
• Third Party Administrator

With the help of the Third-Party Administrator and Advisor, a plan document will be created. This will include:

• Eligibility for employees
• Vesting schedule
• Employer contribution information
• Withdrawals and distributions

Once plan provisions are agreed upon and the plan document is created, there will be a couple additional meetings between all parties to ensure everything is set up properly.

The next step is to notify employees and begin enrolling them in the plan. This will be with the help of the advisor, and can be done at an in-person education and enrollment meeting if the situation permits.

To summarize, we have included a checklist for starting up a 401(k) plan:

1. Establish objectives and goals for the retirement plans
   1. Some possible objectives are:
      1. to retain employees at the organization
      1. maximize employee retirement funds
2. Select the Plan Provider
3. Choose a Plan Design
4. Create and review plan documents
5. Set up payroll for the plan
6. Provide plan information to eligible employees
7. Go live with the plan

It can be very helpful to employ the assistance of a financial advisor who specializes in 401(k) plans to guide you through the steps of setting up a plan.

What Should Small Business Owners Know About Retirement Plans?

Offering a retirement plan is a great way to retain talent and incentivize employees to plan for retirement. For small businesses, it is important to analyze their goals to choose the appropriate retirement plan.

If the only employees are the owner and a spouse, a Solo 401(k) may be the best option by having high contribution limits and relatively simple requirements to establish the plan.

If the company has employees, but less than 101, they can offer a SIMPLE IRA to encourage employees to save while keeping administrative costs low.

A 401(k) plan is also an option if the employer is looking to contribute more to employee accounts than the SIMPLE IRA.

The costs and maintenance associated with the plan are higher than the Solo 401(k) or SIMPLE IRA, but for a company positioned to grow and wants to retain talent, it is a great option.

If you are trying to set up a new group retirement plan, give Langan Financial Group a call.  As experts in group retirement plans, we can help you identify your goals, set up, and manage a group retirement plan customized according to your needs.

About the Business Retirement Plan Authors

Alexander Langan, J.D, CFBS, serves as the Chief Investment Officer at Langan Financial Group. In this role, he manages investment portfolios, acts as a fiduciary for group retirement plans, and consults with clients regarding their financial goals, risk tolerance, and asset allocation. 

With a focus on ERISA Law, Alex graduated cum laude from Widener Commonwealth Law School. He then clerked for the Supreme Court of Pennsylvania and worked in the Legal Office of the Pennsylvania Office of the Budget, where he assisted in directing and advising policy determinations on state and federal tax, administrative law, and contractual issues. 

Alex is also passionate about giving back to the community, and has participated in The Foundation of Enhancing Communities’ Emerging Philanthropist Program, volunteers at his church, and serves as a board member of Samara: The Center of Individual & Family Growth. Outside of work and volunteering, Alex enjoys his time with his wife Sarah, and their three children, Rory, Patrick, and Ava. 

Harry Claypool currently serves as an Associate 401(k) Advisor at Langan Financial Group where he assists Alex in servicing retirement plans, preparing plan reviews, and handling administrative work.

In his free time, Harry enjoys visiting new restaurants, spending time with friends and family, and watching the Eagles. 

About Langan Financial Group: 401(K) Financial Advisors

Langan Financial Group is an award-winning financial planning firm with offices in York, Pennsylvania and Harrisburg, Pa.   

With over 100+ 5-star reviews, Langan Financial Group is an independent financial planning firm established in 1985, offering a broad range of financial planning services.  

With an open architecture platform, our advisors have access to a diverse range of products, free from any sales quotas.  

Our team of 9 financial experts, each with unique specialties, enhances our ability to focus on delivering value to our clients. 

Disclosure 

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice.

Please consult legal or tax professionals for specific information regarding your individual situation. 

The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

Securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. 

Investment Advisor Representative, Cambridge Investment Research Advisors, Inc. a Registered Investment Advisor. Cambridge and Langan Financial Group, LLC are not affiliated.  

Cambridge does not offer tax or legal advice.