Retirement benefits aren’t a luxury reserved just for midsized and large businesses. A variety of retirement plan solutions exist today, from 401(k) to SIMPLE IRAs and SEP IRAs, that can help small business owners not only secure a nest egg for themselves, but also attract and retain talented employees.

What types of 401(k) plans are available for small business owners?

Small business owners generally have many retirement plan options to choose from, some of which may be more appropriate than others, depending on the size of their organization. Examples include:

Traditional 401(k)

Employees can contribute pretax dollars from their earned wages, which their employer may or may not choose to match, up to an annual maximum. These types of plans require a considerable degree of administrative resources because they must undergo rigorous non-discrimination testing.

Individual or solo 401(k)

A solo 401(k) is intended for sole proprietors and other small businesses who have no employees other than a spouse. Through a combination of elective salary deferrals and profit sharing, these plans allow participants to contribute more of their income than would be possible with some other types of retirement plans.

SIMPLE IRA

Businesses with less than 100 employees may be eligible for a SIMPLE IRA. It’s usually easy to manage because there’s no discrimination testing, but employers must contribute to it and participants are fully vested immediately. SIMPLE IRAs also cap employee contributions at a lower amount than 401(k) plans.

Safe Harbor 401(k)

Safe Harbor plans satisfy non-discrimination testing because employers are required to either match contributions from plan participants or make non-elective contributions for all eligible employees.

Roth 401(k)

Because employees contribute post-tax dollars to a Roth 401(k), it has the advantage of tax-free withdrawals at the time of retirement. Employers who sponsor this type of plan must also offer a traditional 401(k).

Explore Learn more about the 401(k) plans offered by ADP

Who is eligible for an individual or solo 401(k) plan?

Generally, only businesses that consist of an owner and a spouse, if that individual also works for the organization, may participate in a solo 401(k). Those who adopt these plans may need to set eligibility requirements, such as years of service. If the business hires non-owner employees who at some point meet those requirements, then the employer may no longer be eligible for an individual 401(k) and would have to choose a different type of plan, e.g., traditional 401(k) or SIMPLE IRA.

Can owners of an LLC contribute to a 401(k)?

Solo 401(k) plans are not limited to sole proprietorships. Businesses that are structured as limited liability corporations (LLC), as well as partnerships, may also participate in these plans if they meet all the eligibility requirements.

Can those who are self-employed contribute to a 401(k)?

There are several different types of retirement plans – Solo 401(k), SEP IRA, SIMPLE IRA and traditional 401(k) – that are available to self-employed individuals. The Solo 401(k), in particular, was designed specifically for entrepreneurs and their spouses. Those whose business is a side venture may also contribute to a 401(k) offered by an employer, but the combined contributions between both plans must not exceed the annual limits set by the IRS.

Can S-corp owners contribute to a 401(k)?

Yes, S-corp owners can contribute to a 401(k) plan. As employees of their S-corporation, they can participate in the company’s 401(k) plan, making both elective deferrals and receiving employer contributions. For 2024, the IRS has set the employee deferral limit at $23,000, with an additional catch-up contribution limit of $7,500 for those aged 50 and over.

What about single-member S-corps?

Single-member S-corporations can establish a solo 401(k) plan, also known as a one-participant 401(k) plan. This plan allows the owner to make both employee and employer contributions. For 2024, the combined limit for these contributions is $69,000, with an additional catch-up contribution of $7,500 for those aged 50 and older.

How does a solo 401(k) plan benefit the small business owner?

The primary benefit to a solo 401(k) is that it permits small business owners to contribute large portions of eligible compensation to the plan, thereby maximizing their retirement savings. Other advantages include:

• Within certain limits, participants may be able to borrow from the plan.
• Filing Form 5500, Annual Return/Report of Employee Benefit Plan may not be necessary, depending on the plan’s balance.
• Since these plans usually only cover one individual, discrimination testing is moot and not required.

Drawbacks to a solo 401(k)

A solo 401(k) may not be right for small businesses that plan to expand and hire employees in the near-term, since doing so would likely result in plan ineligibility. In addition, calculating profit-sharing contributions for sole proprietorships and partnerships tends to be complex because it requires modified net profits. The formula for this calculation is available in IRS Publication 560.

What else do small business owners need to know about 401(k) plans?

Small business owners who offer retirement savings plans may be able to take advantage of tax incentives. Matching employee contributions, for instance, is generally tax deductible as a business expense. For the first three years of the plan, employers may also be eligible for tax credits up to 50% of the start-up and administration costs or $5,000 (not to exceed $250 per non-highly compensated employee), as well as a $500 automatic enrollment credit per year.

How do small business owners choose the best 401(k) for their needs?

To find the right 401(k) for their small business, employers generally look for plan providers that:

• Charge reasonable plan and investment fees and have no hidden costs
• Provide real-time integration between the 401(k) recordkeeping and payroll systems to eliminate manual data entry and reduce errors
• Offer a simplified compliance process
• Make administrative fiduciary oversight available
• Offer ERISA bond and corporate trustee services
• Help with investment fiduciary services and plan investment responsibilities
• Make investment advisory services available for employees

Small business retirement plan comparison chart

This chart reflects annual limits for 2024:

Plan Type	Best for	Employee Contribution	Employer Contribution
Traditional 401(k)	Flexible growth	Up to $23,000 + $7,500 if 50+ years old	Match or profit-sharing, up to $69,000 (Not counting catch up contributions)
Solo 401(k)	Self-employed, no employees	Up to $23,000 + $7,500 if 50+ years old	25% of compensation or $69,000 combined (Not counting catch ups)
SIMPLE IRA	≤ 100 employees	Up to $16,000 + $3,500 if 50+ years old	Either match employee contributions dollar for dollar up to 3% of compensation or 2% of each eligible employee’s compensation
Safe Harbor 401(k)	Avoiding compliance tests	Up to $23,000 + $7,500 if 50+ years old	Either match employee contributions up to 4% of compensation or 3% of each eligible employee’s compensation
Roth 401(k)	Tax-free withdrawals	Up to $23,000 + $7,500 if 50+ years old	Match or profit-sharing, up to $69,000 (Not counting catch ups)

 

Frequently asked questions about 401(k) for small business owners

 

M-611128-2024-09-24. All figures stated within this article are sourced from the IRS.

This information is intended to be used as a starting point in analyzing employer-sponsored 401(k) plans and is not a comprehensive resource of all requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services. For specific details about any 401(k) they may be considering, employers should consult a financial advisor or tax consultant.

Unless otherwise agreed in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products, financial advisors or service providers; engage or compensate any financial advisor or firm for the provision of advice; offer financial, investment, tax or legal advice or management services; or serve in a fiduciary capacity with respect to retirement plans. All ADP companies identified are affiliated companies.

ADP, Inc. is affiliated with ADP Broker-Dealer, Inc. (“ADP BD”), a limited purpose broker dealer registered with the Financial Industry Regulatory Authority (“FINRA”), and operating pursuant to Securities and Exchange Commission (“SEC”) Rule 15c3-3(k)(2)(i), approved by FINRA to offer 401(k) and SEP/ SIMPLE IRAs, and related retirement plans (the “Retirement Products”) on a payroll deduction basis.