How to Pick the Right Retirement Plan for Your Business

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1. Feature: How to Pick the Right Retirement Plan for Your Business (4 min)

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Small business owners usually worry about two things: revenue and retirement. Revenue is a daily grind. Retirement often waits until “someday,” which has a bad habit of arriving all at once.

The good news is that you now have more retirement plan options than ever, and several recent changes make it cheaper and easier for small employers to start a plan. The challenge is not a lack of choices. It is knowing which one fits your business.

This guide walks through the major options, the rules that matter for 2025, and a simple way to choose.

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Step one: decide who the plan is really for

Before you dive into acronyms, ask one basic question:

Is this plan mostly for you as the owner, or for you and your employees?

If you are alone (or only employ a spouse), you live in a different world from an owner with a growing team. The tax code recognizes that. It gives owner-only businesses options that don’t apply once employees enter the picture.

IRS Publication 560 is the main roadmap for small-business retirement plans, including SEP, SIMPLE, and qualified plans such as 401(k)s.

With that in mind, we can take the plans one at a time.

Solo 401(k): the heavy hitter for owner-only businesses

If you have no employees other than a spouse, the Solo 401(k) is often the strongest option.

You can contribute in two ways:

• as an “employee,” through salary deferrals
• as an “employer,” through a profit-sharing contribution

Together, these can reach high annual limits, especially if you are age 50 or older and your plan allows catch-up contributions.

Many Solo 401(k) documents are drafted to allow Roth contributions, loans, and participation by a spouse who earns income from the business. These features are permitted under IRS rules but depend on the specific plan document and provider.

For many owner-only businesses, a Solo 401(k) offers the best mix of high limits, flexibility, and control. Just remember that once you hire eligible employees, you will need to convert it to a standard 401(k).

SEP-IRA: simple and generous for very small teams

A SEP-IRA is designed to be easy to run. Contributions go into individual SEP-IRAs owned by each participant.

Two rules matter most:

1. Contributions are employer-only. Employees do not defer from their own pay.

2. You must contribute the same percentage of compensation for each eligible employee, unless the plan document permits a special allocation method.

SEP contributions can be large. Employers may contribute up to 25% of eligible compensation, subject to IRS limits. For self-employed owners, the effective percentage is lower because “compensation” is defined using net earnings after certain adjustments.

If you are solo or have a tiny team and want a low-administration plan with flexible employer contributions, a SEP-IRA belongs on your shortlist.

SIMPLE IRA: the “starter” plan for small teams

A SIMPLE IRA is designed for employers with 100 or fewer employees. Employees can defer from their pay, and the employer must make a small match or a fixed contribution for all eligible employees.

The tradeoffs are clear:

• Lower contribution limits than most 401(k)s
• Very light administrative burden
• No annual Form 5500 filing
• Predictable employer contribution costs

SECURE 2.0 also gives certain SIMPLE plans the option to adopt higher contribution limits if the employer makes more generous contributions. Most small businesses still use the standard limits, but the enhanced option exists for those who want it.

If you want a straightforward benefit that is easy to explain and run, a SIMPLE IRA is often the right starting point.

Traditional 401(k): the flexible plan for growing businesses

A full 401(k) plan offers the broadest menu:

• pre-tax and Roth employee deferrals
• employer matching and profit-sharing contributions
• higher overall limits
• optional plan features such as loans and customized vesting schedules

It also requires more administration and annual testing. Most owners hire a third-party administrator to handle the technical work.

If you expect to hire, retain, or compete for talent, a 401(k) often becomes the most credible benefit you can offer.

Safe Harbor 401(k): predictability in exchange for a promise

A Safe Harbor 401(k) is a specific design that satisfies the IRS nondiscrimination tests automatically, as long as the employer makes the required contribution.

In practice, it means:

• owners and highly compensated employees can generally contribute more without testing concerns
• employees receive a clear, reliable benefit
• annual compliance is more predictable

If you want a 401(k) that “just works,” Safe Harbor is often the right structure.

Key 2025 and SECURE 2.0 changes owners should know

Several updates matter for small employers beginning in 2025.

Automatic enrollment for many new 401(k) and 403(b) plans

Most new plans adopted on or after December 29, 2022 must automatically enroll eligible employees starting with plan years beginning after December 31, 2024, unless the employer qualifies for an exception (for example, 10 or fewer employees or being in business less than three years).

Long-term part-time employees (LTPT)

Beginning in 2025, employees who work at least 500 hours in two consecutive years must be allowed to make salary-deferral contributions. Plans can be drafted to limit certain employer contributions for this group, but not the right to defer.

Higher catch-up limits at ages 60 through 63

Starting in 2025, individuals who are age 60, 61, 62, or 63 during the year can qualify for a higher catch-up limit. For 2025, the IRS indexed this special limit to $11,250. Plans must be amended to offer it.

Roth-only catch-up for higher earners in 2026

Beginning with plan years starting after December 31, 2025, catch-up contributions for employees whose prior-year wages exceed the (indexed) $145,000 threshold must be made as Roth contributions. The IRS provided a transition period through the end of 2025.

Expanded tax credits for new plans

SECURE 2.0 significantly expanded startup credits. Many small employers can now receive up to $5,000 per year for three years for plan startup costs, plus an additional credit tied to employer contributions for lower-paid employees, and a separate credit for adopting automatic enrollment.

A simple way to choose

A practical rule of thumb keeps the decision manageable.

If you have no employees other than a spouse, compare a Solo 401(k) and a SEP-IRA.
If you have a small team and want simplicity, consider a SIMPLE IRA or a SEP-IRA.
If you are growing, competing for talent, or want flexibility, focus on a 401(k) or Safe Harbor 401(k).

Retirement plans are tools. The right one is the one you will actually use and maintain. Choose a structure that fits your business today, take advantage of the tax credits available, and revisit the design as your company grows.

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