Statistics show that small businesses offer retirement plans less often than larger employers. According to a Transamerica Center Study (2013), about 71% of businesses with fewer than 99 employees offer retirement plan. Business owners are not required to establish a retirement account for employees or for themselves. However, financial advisers strongly recommend retirement plans for small business owners because they offer unique tax advantages and long-term savings benefits. Management consultants also recommend providing retirement plan options to employees to improve employee retention.

Small business owners often struggle to find the right retirement plan for their business. Ease of plan administration is always a big concern. Most small business owners don’t select 401(k) or 403(b) plans because these plans are frequently too expensive to establish.

The IRS has introduced several plan types for small businesses, but there are three retirement plans in particular that are very popular with small business owners: Single Participant 401(k) plans, SIMPLE IRAs, and SEP IRAs. These structures limit the amount of paperwork needed and maximize retirement plan benefits to SMEs:

Single Participant 401(k) Plan

Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, tax laws changed to allow business owners and sole proprietors to increase their contribution limits and eased restrictions on employee deferrals. The single participant 401(k) plan enables principals to take advantage of this tax law. The employer can either make contributions as an employee or principal of the business. Many financial advisers believe it is better to contribute as a business principal if the contributor receives an income from the business, regardless of its level of profitability. This option increases total contribution limits for the business owner or sole provider a great deal.


With a SIMPLE (Savings Incentive Match Plan for Employees) IRA, the business must have no more than 101 employees and provide no other retirement plan option. The administrator fills out several forms a year and employee establishes an individual IRA account. Then, his or her employer matches or manages the contributions. Simple IRA administration costs are often less than 401(k) plans.


SEP (Simplified Employee Pension) IRA plans generate savings and tax benefits for both small business principals and employees. The contributor arranges direct contributions from each paycheck. Since each individual in the plan arranges his or her own IRA, the business is not required to administer them. The business may decide to match employee contributions and/or accommodate the employee with the direct payroll debit and deposit to IRA feature. Each employee administers the IRA at that point.