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Retirement accounts for small businesses

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It sounds like such a leisurely word, doesn’t it? When you think of retirement, you might envision sunny beaches, road trips or spending as much time as you can visiting your grandchildren (fur kids included). But before those dreams can become a reality, there’s quite a bit of planning to be done.

Making sure your employees have a tidy nest egg to begin their golden years is both a joy and a responsibility. Providing the right benefits, particularly in the form of retirement accounts, can help your employees start their retirement path on the right foot. Not only does it help retain and attract quality employees, but it can also provide tax advantages for your business.

Let’s explore the options available and the considerations small business owners should keep in mind.

Available retirement account options for employees

Choosing the right type of retirement account can feel like hunting for buried treasure. Let’s uncover the retirement options available to you and your employees.

  1. Simplified Employee Pension (SEP) IRA. Think of SEPs as The Three Musketeers: All for one, and one for all. This option is great for self-employed individuals, freelancers and small business owners. For 2023, the contribution limit is the lesser of 25% of each employee’s salary or $66,000.

  2. Savings Incentive Match Plan for Employees (SIMPLE) IRA. For businesses with 100 or fewer employees, the SIMPLE IRA lets both employers and employees contribute. For 2023, employers can either match employee contributions (up to 3% of the employee’s compensation) or make a fixed 2% contribution for all eligible employees. Employee contributions can’t exceed $15,500.

  3. 401(k) plan. Often considered the gold standard of retirement plans, 401(k) accounts are an option for any business, including self-employed individuals. For 2023, employees are limited to contributing $22,500, with an additional $7,500 for catch-up contributions (for those age 50 or over). Total contributions (employee and employer) are limited to the lesser of 100% of employee compensation or $66,000.

  4. Profit-sharing plan. As the name implies, these plans allow employers to share a portion of the business’s profits with their employees. For 2023, contributions cannot exceed 100% of an employee’s salary or $66,000. If also participating in a 401(k), contributions can’t be more than 25% of the compensation paid or accrued during the year.

Potential pitfalls to consider

While charting the course of retirement benefits offers numerous advantages, it’s important to be aware of potential challenges. Let’s delve into some complexities and considerations business owners and employees may encounter.

For business owners

  • Administrative costs and responsibilities. Offering retirement benefits, especially 401(k) plans, can introduce significant administrative tasks, like record-keeping, regular compliance testing and mandatory filings.

  • Fiduciary duty. When you sponsor a retirement plan, you have a fiduciary duty to act in the best interest of plan participants. You’ll need to carefully select and monitor investment options to ensure fees are reasonable.

  • Cost implications. While retirement accounts can offer tax advantages, they also come with costs, including setup fees, annual charges and other administrative expenses.

  • Vesting schedules. Plans that include an employer match often have vesting schedules. If an employee leaves before they’re fully vested, they run the risk of forfeiting a portion of the employer’s contributions.

  • Plan termination. If you decide to end the retirement plan, there are processes and potential costs associated with terminating a plan properly.

 For employees

  • Investment risks. Employees have the responsibility of choosing their investments within a retirement account. Without the proper guidance, they may fail to diversify properly, which could potentially jeopardize their retirement savings.

  • Limited liquidity. It’s essential for employees to understand that most retirement accounts are designed for long-term savings. Early withdrawals can lead to additional taxes and penalties.

  • Fees. Some retirement plans require associated fees with their investment options. High fees can erode investment returns over time, so it’s important to be aware of this when choosing investments.

  • Vesting schedules. As mentioned, if employees leave before they’re fully vested, they may not get the full benefit. This can be frustrating for employees who may leave before they reach a vesting milestone.


Offering retirement accounts to your employees is a commendable and strategic decision for any small business. While there are many benefits, it’s important to navigate the retirement plan terrain with as much information as possible.

Consult with a financial professional so they can guide you on the best options for your specific business model and make sure you’re not only supporting your employees’ future—but also securing the financial health of your business.