Many small business owners shy away from traditional retirement plans due to high costs and administrative burdens. However, there are alternatives that reduce complexity, yet still have in-demand features, like automated deposits, employer matching contributions and tax incentives. Employer matching, in particular, demonstrates a commitment to employee financial well-being and may help attract and retain talent. Employers who aren’t yet reaping these benefits may want to take a closer look at retirement plans for small businesses.
1. 401(k) plan and SIMPLE IRA
The Savings Incentive Match Plan for Employees (SIMPLE) and SIMPLE IRA combine the features of a traditional 401(k) with simplified administration. These options are suitable for companies with 100 or fewer employees seeking a small business retirement plan that’s easy to administer.
Key features
- Employer contributions: Employers are required to match employee contributions (up to 3% of their compensation) or provide a non-elective contribution of 2% of each eligible employee’s compensation, regardless of their participation.
- Lower administrative burden: These plans do not require annual nondiscrimination testing, saving time and money.
- Contribution limits: Employees can contribute up to $16,500 in 2025, with an additional $3,500 catch-up contribution, totaling $20,000 for those age 50 or older. If a company has 25 or less employees, the employees may defer an additional 10%, or $17,600, and a catch-up contribution of $3,850. If the company has more than 25 employees, employees can defer the higher limits if the employer makes an additional employer contribution. Participants who are ages 60 to 63 have an increased catch-up limit and may defer $5,250 in catch up.
Advantages
- Easy to set up and maintain
- Non-discrimination testing is not required
- Mandatory employer contributions help employees benefit from the plan
Disadvantages
- Contribution limits are lower than traditional plans
- Mandatory employer contributions can be a financial obligation
2. Safe harbor 401(k) plan
A safe harbor plan eliminates the need for nondiscrimination testing by requiring employer contributions. The design is flexible with different contribution formulas that employers can choose from.
Key features
- Employer contributions: Employers must provide either a match of 100% on the first 3% of an employee’s compensation (plus 50% on the next 2%) or a non-elective contribution of 3% of compensation for all eligible employees.
- Higher contribution limits: Employees can contribute up to $23,500 in 2025, with an additional $7,500 catch-up contribution for those age 50 or older.
Advantages
- Avoid nondiscrimination testing, which simplifies plan administration
- Allows higher employee contribution limits compared to SIMPLE plans
- Highly customizable with Roth and profit-sharing options
Disadvantages
- Mandatory employer contributions can be expensive
- Slightly higher administrative costs compared to SIMPLE plans
Read more about safe harbor 401(k) plan examples, including the different matching contribution formulas.
Side by side comparison of SIMPLE and safe harbor plans
| Feature | SIMPLE IRA | Safe harbor 401(k) |
|---|---|---|
| Business size | Small businesses with 100 or fewer employees | Any size |
| Contribution limits | Lower ($16,500 in 2025) | Higher ($23,500 in 2025) |
| Employer contributions | Mandatory | Mandatory and often more generous |
| Employee vesting | Employer contributions are immediately 100% vested | Employer contributions are immediately 100% vested |
| Non-discrimination testing | Not required | Not required |
| Administration | The simplest and lowest cost retirement plan | More administration required |
| Loans | Not allowed | Depending on the plan |
| Plan design flexibility | Limited to basic employer and employee contributions | Highly customizable with features that include Roth options and profit-sharing |
5. Starter 401(k) plan
A starter 401(k) plan is an entry-level option for employers who don’t already offer a small business retirement plan and want benefits that are simple and affordable.
Key features
- Employee-only contributions: Employers are not permitted to make contributions.
- Lower contribution limits: The annual employee contribution limit for 2025 is $6,000, with an additional $1,000 catch-up contribution allowed for those age 50 and older.
- Automatic enrollment: Employees are automatically enrolled at a contribution rate set by the business, ranging between 3% and 15% of their salaries, unless they opt out.
Advantages
- Budget-friendly with simplified plan management that reduces administrative tasks
- Exempt from nondiscrimination testing
- Encourages employees to save and prepare for retirement with access to a tax-advantaged savings option
- More investment options than state plans
Disadvantages
- May not be suitable for higher income employees looking to maximize retirement contributions
- Lack of employer contributions may reduce employee engagement
Potential tax incentives
The SECURE 2.0 Act of 2022 (SECURE 2.0) enhanced tax credits for small businesses that offer a 401(k) plan. As a result of this legislation, small businesses can claim a tax credit for the first three years of a new 401(k) plan to cover qualified startup costs, including expenses for establishing and administering a plan and educating employees about it.
Businesses with 50 or fewer employees can claim a tax credit for 100% of startup costs, up to a maximum of $5,000 per year. Businesses with 51 to 100 employees can claim a tax credit for 50% of startup costs, up to a maximum of $5,000 per year.
Discover potential tax incentives using the ADP SECURE Act Tax Credit Calculator.
ADP Starter-k Complete
ADP puts retirement plan benefits within reach with the affordable, easy-to-manage ADP Starter-k Complete. It’s designed to be a streamlined experience without the administrative burden often associated with traditional plans.
Starter-k Complete takes care of complex tasks with embedded 3(16) administrative fiduciary services and 3(38) investment management services, so small companies can stay focused on their businesses. It also features the tax flexibility of Roth contributions and allows loans and hardship distributions, giving employees access to their money when they need it most.
ADP retirement plans for small businesses
ADP’s retirement plan solutions readily meet the unique needs of different small businesses. We provide a personalized experience using advanced technology and analytics that help employers and their employees make better retirement plan decisions. Plan administrators and participants also have access to a robust resource center with educational content on a variety of financial wellness topics.
Employers already using an ADP payroll solution have even more reason to choose ADP Retirement Services. Data seamlessly integrates across both platforms to help simplify administration and reduce compliance risk.
ADP delivers everything you need to manage retirement benefits and help employees meet their saving goals.
Learn MoreCompliance Code:
M-683447-2025-02-05
ADP Inc. owns and operates the ADP.com website. Unless otherwise disclosed or agreed to in writing with a client, ADP, Inc. and its affiliates (ADP) do not endorse or recommend specific investment companies or products. Please consult with your own advisors for such advice. Investment options are available through the applicable entity(ies) for each retirement product. Investment options in the “ADP Direct Products” are available through either ADP Broker-Dealer, Inc. (ADP BD), Member FINRA, an affiliate of ADP, Inc., One ADP Blvd, Roseland, NJ 07068 or (in the case of certain investments) ADP, Inc. Only registered representatives of ADP BD may offer and sell ADP retirement products and services or speak to retirement plan features and/or investment options available in any ADP retirement products.
