What Retirement Plan Is Right for My Small Business?

A self-employed business owner with no other employees (other than a spouse) can establish a self-employed or solo 401(k) plan to maximize personal retirement plan contributions. Whether you’re a sole proprietor, S Corp, or C Corp business owner, you will be able to contribute up to 100% of your compensation up to the annual limit, which is $23,000 in 2024.

If you’re over 50, you can contribute an extra $7,500. Not only can you save as an employee, but you may contribute to your account as an employer as well – up to 25% of your compensation to a maximum of $69,000 (for under age 50) or $76,500 (for age 50 and older) in 2024.

Best of all, the plan offers tax-deferred growth, and incorporated businesses may write off contributions as a business expense. Even if the business is not incorporated, business owners can deduct their contributions from taxable income for the year. The only caveat is that you’ll have to hire a plan administrator and file Form 5500 with the IRS annually once the plan reaches $250,000 in assets.

The SIMPLE 401(k) is an option for companies with fewer than 100 employees that wish to bypass some of the administrative burdens of a traditional 401(k).

Employees earning at least $5,000 a year can contribute if they want, but the employer is obligated to make a matching contribution up to 3% of each employee’s salary or make a non-elective contribution of 2% of each employee’s salary, vested immediately. The employer will need to fill out Form 5500 each year, but annual nondiscrimination testing can be skipped.

When compared to its cousin, the SIMPLE IRA, the SIMPLE 401(k) can allow loans from the plan, which is an attractive option for some small business owners. For 2023, the maximum contribution to a SIMPLE 401(k) plan is $15,000, plus an additional catch-up contribution of $4,000 for people age 50 or older.

Unfortunately, you don’t have the flexibility to customize a SIMPLE 401(k) plan for the unique needs of yourself or your business the way you do with a 401(k). If you have employees in the plan, any contributions that you (the employer) make to your employees’ plans are immediately vested. That means your employees own those funds (and can take them with them to a new job) the moment they are contributed. With a 401(k), employers can set vesting schedules, so that employer contributions are only fully vested after the employee stays with the company for a certain amount of time.

Because of all these disadvantages, Ubiquity does not offer SIMPLE 401(k) plans. We find that most individuals and businesses get more benefit from a traditional 401(k).

A Safe Harbor 401(k) is very similar to the SIMPLE 401(k) in that it bypasses nondiscrimination tests with mandatory 100% vested employer contributions.  Any non-governmental organization can be eligible, with any employee over 21 with at least one year of service allowed to participate in the plan, regardless of annual compensation.

Employers can choose:

• A basic match (100% match on the first 3% of employee contributions and 50% match on the next 2%)
• An enhanced match (100% match on 4-6% of employee contributions)
• A non-elective contribution worth 3% of an eligible employee’s salary

Safe Harbor plans are more flexible to roll over into another qualified plan or IRA upon termination, retirement, or reaching age 59.5. Business owners can add profit-sharing plans onto their Safe Harbor 401(k)s to retain control over what they personally save for their own retirements and also to reward top talent up to the individual maximum of $69,000. You can also add a safe harbor provision onto any 401(k) plan mid-year, particularly if you fear you may not pass nondiscrimination tests.

A small business 401(k) is highly customizable with a number of features that your plan administrator can add to ensure you get the most out of your retirement plan.

Roth 401(k): An Easy Option for the Old and the Young

A Roth plan allows individual plan participants to choose to pay taxes on deferrals upfront (to avoid paying taxes later, when they take money out of their retirement account). It’s an easy, flexible option to add to plans. Roth contributions are very popular among small businesses. Many older employees like the idea of tax-free income as they near retirement, but younger employees like the Roth option too, as they may be in a higher tax bracket by the time they retire.

Automatic Enrollment: A Solution for Low Enrollment and Nondiscrimination Fails

Automatic enrollment signs up all eligible employees for the 401(k) plan – unless they specifically opt-out. If you’re worried about passing nondiscrimination tests due to low enrollment, adding this feature is an easy solution to increase plan participation and increase the amount Highly Compensated Employees can contribute.

Another advantage to auto-enrollment is that the SECURE Act allows the business to earn a $500/year tax credit for the first three years of automatic enrollment. Despite all these benefits, less than 10% of small businesses add automatic enrollment to their plans because owners fear employees will not like having their take-home pay reduced without their explicit consent.

Profit-Sharing: A Strategy for Boosting Worker Productivity and Rewarding Performance

Profit-sharing adds flexibility to a 401(k) by letting small business owners allocate an additional contribution to any plan participant, regardless of the employee’s own contributions. More than three-quarters of small business employers choose to add this feature.

Discretionary contributions can be made to any eligible plan participant based on a number of different formulas. A new comparability or integrated formula can be the least expensive way to get business owner contributions up to the legal IRS limit. For startups with erratic profitability or frequent acquisitions, employers can make varying contributions (or no contributions at all), depending on the business climate each year.

In general, profit-sharing is a great way to get employees to care about your bottom line and work hard to make your business more profitable.

Over more than 20 years, Ubiquity has helped thousands of small businesses establish 401(k) savings plans, fully customized to their needs. Once the plan is drawn up, we assist with annual IRS filings, administrative tasks, and ongoing maintenance. We provide your company with full support, including employee education and a toll-free customer service hotline.

Best of all, we offer service at a flat monthly rate, with no AUM fees and no per-participant charges. Contact us to learn which plan design will best support your business objectives.