When start-ups launch, their focus is often on tightly controlling expenses. Most need to establish a brand and some semblance of stability before funding anything other than essential operating activities.
For companies that make it past that tenuous initial stage, there comes a time when they must loosen up the purse strings and start investing in, among other things, 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.
Has your company reached this point? Or is it almost there? If so, let’s review three of the most popular plan types that growing businesses should consider.
1. Traditional 401(k) Plans
These are available to any employer with one or more employees. Under the plan, participants are given 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 pre-tax payroll deductions, which reduce their taxable income. Distributions, however, are taxable.
For 2025, 401(k) participants can contribute up to $23,500 (up from $23,000 in 2024). Those age 50 or older by the end of the year can make additional “catch-up” contributions of $7,500 (the same amount as in 2024). Your business may also opt to contribute to participants’ accounts under a vesting schedule of your choosing. 2025 the total combined limit for employee and employer contributions is $70,000. Within limits, your company can deduct contributions made on behalf of 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.
2. SEP-IRAs
If choosing a 401(k) plan and administering it seems a bit overwhelming, there are simpler options. Case in point: Simplified Employee Pension Individual Retirement Accounts (SEP-IRAs). Businesses of any size can establish a plan to offer these accounts 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 (up from $69,000 in 2024).
3. SIMPLE IRAs
Another less complex approach is sponsoring Savings Incentive Match Plan for Employees (SIMPLE) IRAs. However, only businesses with 100 or fewer employees can offer them.
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, including to employees who don’t contribute.
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 (up from $16,000 in 2024).
Many Options
To be clear, these are but 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 all of them, including forecasting the costs involved and understanding the tax implications.