Retirement Plan Options Available for Small Businesses and Self-Employed Individuals

If you are starting your own business, opening up a private practice or thinking about implementing a new retirement plan for your existing business, you have several retirement plan options available to you.

Below is a list of the primary retirement plan options for small businesses summarizing the key features (for 2023) of each plan.

SEP-IRA

• • Contribution limits:
    • 25% of employee W-2 wages up to a maximum contribution of $66,000, or
    • 20% of owners net SE income (for Schedule C and Partnership income) after the self-employment tax deduction up to a maximum contribution capped at $66,000
  • Date to establish and fund the plan:
    • The filing date of the tax return including extension
  • Form 5500 annual tax return filing requirement:
    • None
  • Best suited for:
    • SE individuals/entities with no employees
    • SE individuals/entities with employees who have worked for less than 3 years
    • Moonlighting individuals paid as an independent contractor (1099-NEC) who decide to contribute additional amounts to a retirement plan when meeting with their tax preparer after December 31, 2023 

Solo 401k

• • Contribution limits:
    • $22,500 as an employee/salary deferral contribution
    • $7,500 as an employee/salary deferral catch-up contribution (if age 50 or greater)
    • 20% of owner’s net SE income after self-employment tax deduction as an employer contribution, or
    • 25% of employee W-2 wages as an employer contribution
    • Total maximum combined contribution capped at $66,000 (or $73,500 including $7,500 catch-up contribution)
  • Date to establish and fund the plan:
    • Plan must be established by December 31 of the current year
    • Employee/salary deferral portion must be contributed by December 31 of the current year
    • Employer contribution must be contributed by the tax return filing date including extension
  • Form 5500 annual tax return filing requirement:
    • Once Plan assets equal or exceed $250,000 at the end of the tax year the Plan is required to file Form 5500-EZ
  • Best suited for:
    • Self-employed individuals with no employees except a spouse (and other employees that work less than 1,000 hours per year)
    • Owner is not already part of a salary deferral plan (401(k), 403(b), SIMPLE) with another employer
    • Owners that annually fund a “Back-Door Roth Conversion”

SIMPLE IRA

• • Contribution limits:
    • Employee elective deferral limited to $15,500 plus catch-up provision of $3,500
    • Employer can either match employee elective deferrals (for only participating employees) dollar for dollar up to 3% of W-2 wages (which can be reduced to 1% in any 2 out of a 5-year period) or contribute 2% of W-2 wages (up to $330K of wages) for all eligible employees (including non-participating employees)
  • Date to establish and fund the plan:
    • Plan must be established by October 1 of the current year
    • Employer contributions must be contributed by the tax return filing date including extension
  • Form 5500 annual tax return filing requirement:
    • None
  • Best suited for:
    • Newly formed or small employer entities that want to offer a salary deferral retirement plan to their employees at minimal costs (with regard to both employer contributions and administration costs), and
    • The owner either cannot afford or prefers not to make a large retirement contribution on his/her own behalf

 401k

• • Contribution limits:
    • Employee elective deferral limited to $22,500 plus catch-up provision of $7,500
    • Combined employee and employer contribution limited to $66,000 or $73,500 including a catch-up provision
    • Typically set up as a Safe Harbor Plan for smaller entities – to guarantee the owner’s contribution is not limited:
      • Non-Elective Safe Harbor Plan: 3% employer non-matching contribution for all eligible employees’ W-2 wages
      • Enhanced Safe Harbor Match: dollar for dollar matching contribution up to 4% (not to exceed 6%) of W-2 wages for participating employees
    • Date to establish and fund the plan:
      • Plan must be established by December 31 of the current year
      • Employer contributions must be contributed by the tax return filing date including extension
    • Form 5500 annual tax return filing requirement:
      • the Plan is required to file Form 5500-EZ
    • Best suited for:
      • Established entities that can afford the company contribution funding amount plus administrative costs
      • The owner plans to significantly fund or maximize his/her retirement contribution

Navigating the maze of retirement plan options to find the best opportunity for your company is not a simple task.  The list above provides a basic summary of information for small business retirement plans.  And working with your tax advisor to fully discuss the pros and cons of each plan as it relates to your practice or business will assist you in determining the best retirement planning strategy for your company.