Retirement Plans for Small Business Owners

Author: / 6 May 2020 / Business

Small business owner finding the right retirement plan


It is commonplace for small business owners to forgo setting up retirement plans for their employees. These proprietors list myriad reasons for this, including the perceived expense, limited administrative resources, and lack of employee interest. However, this trend is changing.

Plan providers who tailor their offerings to small business clientele make it easy to get started saving for retirement and saving at tax time, without worrying about AUM fees or employee education. Ubiquity is such a plan provider. Contact us when you are ready and let us help you get started.

In the meantime, please read on to learn more about your various options. There are three main types of retirement plans popular with small business owners: SEP, SIMPLE IRA, and 401(k). Understanding the benefits available under each type of program will lead you to the best fit for your company.


SEP IRA stands for Simplified Employee Pension Individual Retirement Account. Among the plans’ many virtues, they are considered some of the easiest to establish and operate.

What is a SEP IRA?

The essential advantage of the SEP IRA is its high annual maximum contribution limit. Like a traditional IRA, taxes are deferred until withdrawals are made, allowing for compound interest. As of 2020, you may contribute up to 25% of your (or an employee’s) net earnings to a $57,000 maximum. Traditional IRAs only allow you to contribute $5,500/year, so the ability to save is much higher under the SEP IRA structure

Employees do not contribute to the SEP IRA; instead, employers make all the contributions. Contributions may be made in a lump sum at the end of the year or skipped for a year altogether. The employer may decide from year to year whether to contribute and how much to contribute. SEP contributions are deposited into eligible employees’ traditional IRAs.

Who is a SEP IRA best for?

  • Sole proprietors – Its simplicity and flexibility make the plan most desirable for the self-employed.
  • Businesses with few employees – Given the contribution rules, it is best if you have few workers.

Are there any caveats to a SEP IRA?

  • If you have people working for you, all eligible employees must be covered equally.
  • Eligible employees are 21 who have worked 3 of the last five years. Employment may be seasonal or part-time.
  • SEP IRAs are easy, but they are not necessarily the most effective means of saving for retirement.

How might a SEP IRA work?

Let’s use the example of “Fred,” a sole proprietor of a small business who establishes a SEP IRA to save for his retirement. He likes the SEP IRA because its flexibility allows him to contribute larger contributions during good times and reduce or skip them during downtimes.

In the first few years of running his business, Fred earned $100,000 and contributed $5,500 to his SEP IRA, similar to what he would have contributed to a traditional IRA. However, in his blowout third year, Fred earns $300,000 and adds the maximum contribution of $57,000, without impact on his lifestyle. A traditional IRA would have only allowed him to set aside $16,500 in those three years, versus $68,000 with the SEP IRA model.

Fred’s business continues to thrive for the next 20 years, and every year he adds the maximum $57,000 to his retirement account. He receives annual returns of 7% and has over $1.4 million in savings. With a traditional IRA, he would have only saved $117,700. As Fred grows his empire, he hires a few employees. The financial institution trustee for the SEP offers several investment funds from which Fred and his employees can choose. Employees can divide their employer’s contributions to their individual retirement accounts as they wish.


SIMPLE stands for Savings Incentive Match Plan for Employees of Small Employers. Only businesses with 100 or fewer employees may establish a SIMPLE IRA plan.

What is a SIMPLE IRA?

The SIMPLE IRA works like a 401(k) plan, allowing employee and employer contributions. One distinct advantage of SIMPLE IRAs is that employer contributions vest immediately. Eligibility requirements are low.

Unlike a 401(k), employers are not subject to complex nondiscrimination testing. Investment options tend to outnumber 401(k) offerings. The SIMPLE IRA delivers on its name, as it is considered easier to set up and administrate than other plans.

For 2020, the maximum annual contribution limit is $13,500, with $3,000 in catchups allowed. Mandatory employer contributions may be 2% flat ($285K maximum cap) or up to 3% if employees participate. As with other Individual Retirement Accounts, taxes are deferred, allowing savings to compound.

Who is a SIMPLE IRA best for?

  • A SIMPLE IRA is ideal for businesses with under 100 employees looking for a 401(k) alternative.
  • A SIMPLE IRA is ideal for employees who want “free employer money,” even if they do not personally contribute.
  • A SIMPLE IRA plan would not be appropriate for a self-employed individual with no employees

Are there any caveats to a SIMPLE IRA?

  • Contribution limits are lower – by $6,000 with a 401(k) and $43,500 for a SEP IRA or Solo 401(k).
  • There is no “Roth” SIMPLE IRA, meaning you cannot pay taxes upfront to avoid them in retirement.
  • You cannot take a loan out of your SIMPLE IRA, should you run into financial trouble.
  • Steep tax penalties apply – 25% within the first two years and 10% thereafter.
  • SIMPLE IRAs are not rollover-friendly and subject to a 25% penalty

How might a SIMPLE IRA work

Let’s use the example of “Jessica.” Jessica runs a successful business with 50 employees. She sets up a SIMPLE IRA with dollar-for-dollar matching up to 3% of each eligible employee’s compensation. Employees who do not participate do not receive any employer match.

Daniel works for Jessica’s company earning $50,000/year, contributing 5% of his compensation ($2,500) to a SIMPLE IRA. Jessica matches his contributions to the maximum amount of 3% ($1,500). The total contribution to Daniel’s retirement account for the year is $4,000.

The SIMPLE IRA offers several investment choices for which employees may choose whatever suits them best. In setting up the plan, Jessica could have also selected a program offering a 2% nonelective contribution; under that option, she could have put $800 into Daniel’s account, even if Daniel himself set aside nothing.

Small Business 401(k) Plan

Small business owners can choose from several 401(k) plans, including a Solo 401(k), Safe Harbor 401(k), Roth 401(k), or Traditional 401(k).

What is a Small Business 401(k)?

A 401(k) is a savings vehicle that helps business owners and employees save for retirement. With any 401(k) plan, employees can defer a part of their salary into the retirement plan. Many businesses choose to match a portion of the employee contributions as a benefit of employment.

Like IRAs, a 401(k) plan allows tax deductions, tax-deferred earnings, and tax credits. A significant advantage of these plans is that they have higher contribution limits than SEP or SIMPLE IRAs. They also provide options to make after-tax contributions (“Roth” contributions) or take out a loan. Typically, 401(k)s offer the broadest range of investment options.

Who is a Small Business 401(k) best for?

  • Companies that want to attract top talent and reduce turnover.
  • New businesses with one or more employees who wish to take advantage of the $5,000 tax credit during the first three years.
  • Business owners who want to grow their retirement savings with contributions, compounding interest, dividends, and capital gains. (if the business has no employees then this arrangement would be a considered a “Solo 401(k)”).

Are there any caveats to the Small Business 401(k)?

  • Due to the significant savings, you must meet strict IRS guidelines and pass compliance testing annually.
  • You must work with a Third Party Administrator for plan setup, annual reporting, and bookkeeping.
  • You will also need a separate Investment Advisor who monitors the menu of investment options.
  • Compared to the SIMPLE IRA, administrative costs, paperwork volume, and plan fees may be higher.

How does a Small Business 401(k) work?

Small business 401(k)s are not just for businesses with hundreds of employees. Consider “Dan” and “Michelle,” a married couple who have launched their own small business.

By the time they are 35 years old, Dan and Michelle have reached salaries of $500,000 per year. They set up an LLC and put $98,000 into their 401(k) each year, lowering their taxable income from $500,000 to $402,000. As they continue to work, they earn dividends, interest, and capital gains, while reducing their tax liability. Working for another 35 years and making 8% interest, their combined 401(k) accounts leave them with over $16.8 million for retirement. Now that’s the beauty of investment!

On a smaller scale, Steve works for “Company X,” making $50,000 a year. His employer offers a 401(k) with matched contributions, so Steve saves 5% of his pay, which amounts to $104.17 from each biweekly check. At tax time, Steve is taxed on $47,500 instead of the $50,000 he earned. By the year’s end, he has saved $2,500 for retirement, but it only cost him $1,875. On top of that, his employer matched dollar-for-dollar, netting him a total of $5,000. Over the next 30 years, Steve’s investments do well at 8%, helping him amass $162,000 in retirement savings.

This is a very modest example, as financial planners recommend that employees reserve 15-20% of their pay for retirement. Yet, you can see how even a small amount of savings can compound over time, particularly when employers match.

Let’s Get Your Small Business on a Retirement Plan

With the budget-friendly, easy-to-use 401(k) solutions from Ubiquity Retirement + Savings, small business owners can take advantage of all the benefits of a 401(k) plan. We understand that small business owners rarely have robust HR departments. Ubiquity helps eliminate the headaches and responsibilities that come with setting up and managing your 401(k) program.

Best of all, we offer a wide range of fund options and charge an industry-low flat fee. In fact, we were one of the first companies to provide a flat fee service with no AUM back when we started in 1999. Feel free to use our digital tools for your education and employee engagement, which is something you will not find with every plan administrator.

We also invite you to contact us online or by phone if you have any questions about retirement plans for small business owners. You’re not just a number to us – entrepreneurs and businesses with less than 500 employees are our bread and butter.

Take the next step – Let me help you.

Contact Jay Jacob, Sr. Retirement Plan Consultant

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44 Montgomery Street, Suite 300
San Francisco, CA 94104

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© 2023 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 300
San Francisco, CA 94104