Solo 401(k)s, SIMPLE IRAs and SEP IRAs: Choosing the right plan for a small business

Opportunity is right around the corner. Drive down most non-residential streets in America and what do you see?  Blocks and blocks of small businesses: Dry cleaners, barber shops, boutique stores, dentists, real estate agent offices, attorneys, etc.

Every one of these businesses has an owner attached to them which may be a sole proprietor, a partnership, or a corporation.  The one thing likely in common is that those owners, and their employees want the opportunity to retire one day and have enough saved to maintain their lifestyle. The most efficient way to do that is through a retirement plan offered by the employer.

Local financial advisors are in the best position to help these small business owners implement the right retirement plan that fits their needs, budgets and goals.  A financial advisor does not need to be a retirement plan expert to work with small business owners.

Small businesses: A large and growing market

In 2021, the U.S. had 33.2 million small businesses, with 98% of them employing fewer than 100 employees, 89% employing fewer than 20, and 8 out of 10 have no employees. The Small Business Administration notes that these diminutive enterprises have generated 65% of new jobs in the country since 2000.

Choosing the right retirement plan starts with the question:  Does the business have employees or does it not?

If the business does not have employees, then the Solo 401(k) or a SEP IRA are available.  Since the introduction of the Solo 401(k), most small businesses with no employees adopt the Solo 401(k) due to the availability of higher overall contribution limits, Roth availability and a loan feature.

If the business does have employees, then the SIMPLE IRA or 401(k) usually makes the most sense.  The SIMPLE IRA can be adopted if the employer has 100 or fewer employees and can be a powerful retirement plan with much lower costs and less administrative responsibilities than a 401(k) plan.

Solo 401(k) features

• Opportunity to maximize business deductions
• Generous contribution limits
• Roth contributions available
• IRA rollover flexibility upon termination
• Ability to take out a loan or consolidate other retirement accounts
• Business owners can contribute to a Solo 401(k) both as the employee and the employer
• A spouse can be added to the payroll too

SEP IRA features

• Simplified Employee Pension (SEP) Plan
• Tax-deferred growth
• All contributions 100%, immediately vested
• No plan level restrictions on withdrawals (IRA rules apply)
• No administrative costs
• Available for any business type, including non-profit and government
• Easy to set up and maintain

SIMPLE IRA features

• Savings Incentive Match Plan for Employees (SIMPLE)
• Tax-deferred growth
• Available for any business type, including non-profit and government
• Mandatory employer match of dollar for dollar up to 3% of compensation or 2% non-elective contribution
• Reduced match is available in two out of five years
• No employee minimum age requirement
• Low-maintenance – minimal employer involvement required
• No cost to establish
• Helps attract and retain good employees
• No government forms to file; no annual reporting

By offering a retirement plan, small businesses offer up a key employee benefit to existing employees, which helps with retention, and also helps in recruiting new talent in a competitive marketplace. Owners benefit from opportunities to maximize their contributions or to reinvest in their businesses.

Recent legislation adds even more impact for small businesses

The SECURE Act 2.0, bipartisan legislation that builds on the original (Setting Every Community Up for Retirement Enhancement), provides new provisions designed to help small businesses offer retirement savings programs to their employees, while continuing to make it easier for all Americans to save for retirement.

Related: SECURE 2.0 Act: 8 key provisions (and effective dates) for small businesses

Many of the SECURE Act 2.0 provisions start in 2024 and beyond but a few begin in 2023 that are helpful for small business owners:

• The credit to start a retirement plan is increased to 100% for companies with 50 or fewer employees.
• SIMPLE and SEP IRA are permitted to be designated as ROTH IRAs.
• Required beginning date for RMDs moved to age 73.

The SECURE Act 2.0 further reinforces the idea that having adequate retirement savings is vital to our citizens overall well-being and saving through their employer’s retirement plan is the one of the most effective ways to build retirement assets.

With the large number of small businesses in this country and the growing number of individuals they employ, now is the right time for financial professionals to explore the opportunity to assist those small businesses in choosing the right retirement plan to fit their needs.

Kevin Watt is Vice President, Security Financial Resources, an affiliate of Security Benefit Life Insurance Company