For companies that make it past their initial stage, there comes a time when they must loosen up the purse strings and start investing in their employees. One way to do so is to sponsor a retirement plan. Offering this fringe benefit lets staff know the business cares about them and their financial futures. Let’s review three of the most popular plan types that growing businesses should consider.
TRADITIONAL 401(K) PLANS
These are available to employers with one or more employees. Under this type of a plan, participants have retirement accounts that they own. This means their contributions are immediately vested, and they retain ownership even if they leave their jobs. Participants typically contribute via pretax payroll deductions, which reduce their taxable income. Distributions, however, are taxable. For 2025, 401(k) participants can contribute up to $23,500. Those age 50 or older by the end of the year can make additional “catch-up” contributions of $7,500. Your business may also opt to contribute to participants’ accounts under a vesting schedule of your choosing. In 2025, the total combined limit for employee and employer contributions is $70,000. Within limits, your company can deduct contributions made for you and your eligible employees. Many companies’ plans now have Roth 401(k) features. This means participants can choose to make some contributions with compensation that’s already been taxed. The upside is that qualified distributions are tax-free.
Establishing a 401(k) plan typically requires, among other steps, adopting a written plan and arranging a trust fund for plan assets. Annually, employers must file Form 5500 and perform discrimination testing to ensure the plan doesn’t favor highly compensated employees. However, with a “safe harbor” 401(k), the plan isn’t subject to discrimination testing. There are also several other 401(k) variations worth considering.
SEP-IRAs
If choosing a 401(k) plan and administering seems a bit overwhelming, there are simpler options. Businesses of any size can establish a Simplified Employee Pension Individual Retirement Accounts (SEP-IRAs) by completing Form 5305-SEP, “Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement.” But there’s no annual filing requirement. From there, you set up and wholly fund a SEP-IRA for each participant. Employer contributions immediately vest with participants, who own their respective accounts. What’s nice is you can decide each year whether and how much to contribute. In 2025, contribution limits will be 25% of an employee’s compensation, up to $70,000.
SIMPLE IRAs
Another less complex approach is sponsoring Savings Incentive Match Plan for Employees (SIMPLE) IRAs. These are available to businesses with 100 or fewer employees. Like SEP-IRAs, these are accounts you set up for each participant. They may choose to contribute to their SIMPLE IRAs but don’t have to. Employer contributions are required, but you can opt to either:
- Match employee contributions up to 3% of compensation, which can be reduced to as low as 1% in two of five years, or
- Make a 2% nonelective contribution which include employees who don’t contribute on their own.
Participants are immediately 100% vested in contributions, whether those funds come from you or their own paychecks. The contribution limit in 2025 will be $16,500
MANY OPTIONS
To be clear, these are three options among many different retirement plan types that growing businesses can sponsor for their employees. Our firm can help you weigh the pros and cons of them, including planning for the costs involved and understanding the tax implications.
