Many of you have probably considered setting up retirement plan options for your business, but you have not yet done so because you’ve assumed it’s too complicated, costs too much, or is too much of an administrative burden for your business. The truth is that with all the cost-effective options for setting up retirement plans, it is becoming harder and harder for businesses to be able to justify not having retirement plan options for employees. And with certain legislation being contemplated, it may soon be possible for businesses to offer retirement benefits to independent contractors.
Below is a brief summary of the retirement plan options that are popular with small and growing businesses. All of these plans are fairly easy to set up with reputable brokerages like Vanguard, Fidelity, Schwab that offer low-cost plans to employers and low-cost investment options for enrolled employees.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
SIMPLE IRAs are best for small businesses that want to offer retirement benefits but don’t want to deal with administrative and other requirements in 401Ks and other more complicated plans. With this plan, employees are able to contribute to their retirement via payroll deductions, with employers providing a matching contribution of up to 3 percent.
Pros and Cons
- Easy and inexpensive to set up and operate.
- Employees share responsibility for their retirement.
- No discrimination testing required.
- Inflexible contributions.
- Lower contribution limits than some other retirement plans (e.g. $16,000 max compared to $23,500 401(k) max).
- An employer generally has no filing requirements.
This plan is popular for businesses with fewer than 100 employees, and works well as a starter (or even long term) retirement plan.
SEP IRA (Simplified Employee Pension)
The SEP IRA is also a simplified retirement plan – as its name suggests – for self-employed individuals or small businesses with few employees. It is easy to set up, and allows business owners to make flexible year-end contributions depending on how successful your business is within a given year.
Pros and Cons
- Easy to set up and operate.
- Low administrative costs.
- Flexible annual contributions – good plan if cash flow is an issue.
- Employer must contribute equally for all eligible employees.
- An employer generally has no filing requirements.
This is not a great plan for businesses with many employees because retirement contributions must be the same for both owners of the business and employees. For example, if you’re the business owner and wanted to contribute 25% of your compensation to your SEP IRA after a profitable year, you would also be required to contribute 25% of each qualifying employee’s compensation to their SEP IRAs. Accordingly, a lot of businesses start off with SEP IRA before they have employees, and then transition to a Simple Plan or 401K as their team grows.
Simple 401(k)
The Simple 401(k), as the name might suggest, is a plan for small businesses that tries to combine the simplicity of the Simple IRA with features of the traditional401(k).
Pros and Cons
- Plan is not subject to the non-discrimination rules that apply to everyday 401(k) plans.
- Employees are fully vested in all contributions.
- Straightforward benefit formula allows for easy administration.
- Optional participant loans and hardship withdrawals add flexibility for employees.
- Withdrawal and loan flexibility adds administrative burden for the employer.
- Annual filing of Form 5500 is required.
The plan is designed for small businesses with fewer than 100 employees.
Traditional 401(k)
The traditional 401(k) is the most comprehensive retirement plan, and can work for small and large businesses alike. The plan involves a range of options including employer matching, Roth features, loans, and advanced customization. These features however come with more paperwork, annual testing, third-party administration, and ongoing oversight.
Pros and Cons
- High contribution limits.
- Customizable features, including Roth and loans.
- Highly appealing to employees.
- Requires nondiscrimination testing.
- Higher administrative costs and complexity.
- Ongoing compliance and recordkeeping.
Employer-Sponsored Retirement Plans for Independent Contractors
Currently, there are no employer-sponsored plans available to independent contractors. This is because employer-sponsored retirement plans are specifically designed for employees. However, change could be on the way. There is currently legislation being proposed under the Unlocking Benefits for Independent Workers Act that would make it possible for companies to offer retirement and other benefits to independent contractors without making them full-fledged employees. See here for more information: https://www.axios.com/2025/07/07/gig-workers-portable-benefits. With a growing number of Americans working independently, there is hope that proposals like this will eventually pass.