CHOOSINGA
RETIREMENTSOLUTION
FORYOURSMALLBUSINESS
Choosing a Retirement Solution for Your Small Business is a joint project of the U.S. Department of Labor’s
Employee Benets Security Administration (EBSA) and the Internal Revenue Service.
To view this and other EBSA publications, visit the agency’s
website.
To order publications or speak with a benets advisor, contact EBSA electronically.
Or call toll free: 866–444–3272
This material will be made available in alternative format
to persons with disabilities upon request:
Voice phone:
(202) 693–8664
TTY: (202) 501–3911
This booklet constitutes a small entity compliance guide for purposes of the Small Business
Regulatory Enforcement Fairness Act of 1996. It does not constitute legal, accounting, or other
professional advice.
Starting a retirement savings plan can be easier
than most business owners think. What’s more,
there are many retirement programs that provide
tax advantages to both employers and employees.
Why Save?
Experts estimate that Americans will need 70 to 90
percent of their preretirement income to maintain their
current standard of living when they stop working. Now
is the time for you and your employees to start planning
for retirement. As an employer, you have an important
role in helping America’s workers save.
By starting a retirement savings plan, you will help your
employees save for their future. Retirement plans may
also help you attract and retain qualied employees, and
they offer tax savings to your business. You will help
secure your own retirement as well. You can establish a
plan even if you are self-employed.
Any Tax Advantages?
A retirement plan has signicant tax advantages:
Employer contributions are deductible from the
employer’s income,
Employee contributions (other than Roth
contributions) are not taxed until distributed to the
employee,
Money in the plan grows tax-free, and
Distributions may be eligible for tax-favored
rollovers or transfers into other retirement programs.
Any Other Incentives?
It’s easy to establish a retirement plan that benets
you, your business and your employees, and there are
additional incentives for having a plan:
High contribution limits so you and your employees
can set aside large amounts for retirement;
“Catch-up” rules that allow employees age 50 and
over to set aside additional contributions. The “catch
up” amount varies, depending on the type of plan;
A tax credit for small employers that enables them to
claim a credit for part of the ordinary and necessary
costs of starting a SEP, SIMPLE, or certain other
types of retirement plans (more on these later). The
credit equals 50 percent of the cost to set up and
administer the plan, up to a maximum of $500 per
year for each of the rst 3 years of the plan;
A tax credit for certain low- and moderate-income
individuals (including self-employed) who make
contributions to their plans (“Saver’s Credit”). The
amount of the credit is based on the contributions
participants make and their credit rate. The
maximum contribution eligible for the credit
is $2,000. The credit rate can be as low as 10
percent or as high as 50 percent, depending on the
participant’s adjusted gross income; and
A Roth program that can be added to a 401(k) plan
to allow participants to make after-tax contributions
into separate accounts, providing an additional way
to save for retirement. Distributions upon death
or disability or after age 59 ½ from Roth accounts
held for 5 years, including earnings, are generally
tax-free.
A Few Retirement Facts
Most private-sector retirement vehicles are either
Individual Retirement Arrangements (IRAs), dened
contribution plans, or dened benet plans.
People tend to think of an IRA as something that
individuals establish on their own, but an employer
can help its employees set up and fund their IRAs.
With an IRA, the amount that an individual receives at
retirement depends on the funding of the IRA and the
earnings (or losses) on those funds.
Dened contribution plans are employer-established
plans that do not promise a specic benet at
retirement. Instead, employees or their employer (or
both) contribute to employees’ individual accounts
under the plan, sometimes at a set rate (such as 5
percent of salary annually). At retirement, an employee
receives the accumulated contributions plus earnings
(or minus losses) on the invested contributions.
Dened benet plans, on the other hand, promise a
specied benet at retirement, for example, $1,000
a month. The amount of the benet is often based on
a set percentage of pay multiplied by the number of
years the employee worked for the employer offering
the plan. Employer contributions must be sufcient to
fund promised benets.
Small businesses may choose to offer IRAs, dened
contribution plans, or dened benet plans. Many
nancial institutions and retirement plan practitioners
make available one or more of these retirement plans
that have been pre-approved by the IRS.
On the following two pages you will nd a chart
outlining the advantages of each of the most popular
types of IRA-based and dened contribution plans and
an overview of a dened benet plan.
1
Maximum compensation on which contributions can be based is $285,000 for 2020 and $290,000 for 2021.
2
Maximum compensation on which employer 2% contributions can be based is $285,000 for 2020 and $290,000 for 2021.
IRA-BASED PLANS DEFINED CONTRIBUTION PLANS
DEFINED BENEFIT
PLANS
Payroll
Deduction IRA
SEP SIMPLE IRA Plan Profit Sharing Safe Harbor 401(k) Automatic Enrollment
401(k)
Traditional 401(k)
Key
Advantage
Easy to set up and maintain. Easy to set up and maintain. Salary reduction plan with little
administrative paperwork.
Permits employer to make large
contributions for employees.
Permits high level of salary deferrals
by employees without annual
nondiscrimination testing.
Provides high level of participation and
permits high level of salary deferrals by
employees. Affords safe harbor relief for
default investments.
Permits high level of salary deferrals by
employees.
Provides a fixed, pre-established
benefit for employees.
Employer
Eligibility
Any employer with one or more
employees.
Any employer with one or
more employees.
Any employer with 100 or
fewer employees that does
not currently maintain another
retirement plan.
Any employer with one or more
employees.
Any employer with one or more
employees.
Any employer with one or more
employees.
Any employer with one or more
employees.
Any employer with one or more
employees.
Employer’s
Role
Arrange for employees to make
payroll deduction contributions.
Transmit contributions for
employees to IRA. No annual
filing requirement for employer.
May use IRS Form 5305-
SEP to set up the plan. No
annual filing requirement for
employer.
May use IRS Form 5304-SIMPLE
or 5305-SIMPLE to set up
the plan. No annual filing
requirement for employer. Bank
or financial institution handles
most of the paperwork.
No model form to establish this
plan. May need advice from a
financial institution or employee
benefit adviser. Must file annual
Form 5500.
No model form to establish this plan.
May need advice from a financial
institution or employee benefit
adviser. A minimum amount of
employer contributions is required.
Must file annual Form 5500.
No model form to establish this plan.
May need advice from a financial
institution or employee benefit adviser.
May require annual nondiscrimination
testing to ensure that plan does not
discriminate in favor of highly
compensated employees. Must file annual
Form 5500.
No model form to establish this plan.
May need advice from a financial
institution or employee benefit adviser.
Requires annual nondiscrimination
testing to ensure that plan does
not discriminate in favor of highly
compensated employees. Must file annual
Form 5500.
No model form to establish this plan.
Advice from a financial institution
or employee benefit adviser would
be necessary. Must file annual Form
5500. An actuary must determine
annual contributions.
Contributors
To The Plan
Employee contributions remitted
through payroll deduction.
Employer contributions only. Employee salary reduction
contributions and employer
contributions.
Annual employer contribution is
discretionary.
Employee salary reduction
contributions and employer
contributions.
Employee salary reduction contributions
and maybe employer contributions.
Employee salary reduction contributions
and maybe employer contributions.
Primarily funded by employer.
Maximum
Annual
Contribution
(per
participant)
See the
IRS’swebsite
for annual updates
$6,000 for 2020 and for 2021.
Participants age 50 or over can
make additional contributions
up to $1,000.
Up to 25% of compensation
(1)
but no more than $57,000 for
2020 and $58,000 for 2021.
Employee: $13,500 in 2020
and in 2021. Participants age
50 or over can make additional
contributions up to $3,000 in
2020 and in 2021.
Employer: Either match
employee contributions 100% of
first 3% of compensation (can
be reduced to as low as 1% in
any 2 out of 5 yrs.); or contribute
2% of each eligible employee’s
compensation.
2
Up to the lesser of 100% of
compensation
(1)
or $57,000 for
2020 and $58,000 for 2021.
Employer can deduct amounts that
do not exceed 25% of aggregate
compensation for all participants.
Employee: $19,500 in 2020 and in
2021. Participants age 50 or over can
make additional contributions up to
$6,500 in 2020 and in 2021.
Employer/Employee Combined:
Up to the lesser of 100% of
compensation
(1)
or $57,000 for 2020
and $58,000 for 2021. Employer
can deduct (1) amounts that do
not exceed 25% of aggregate
compensation for all participants and
(2) all salary reduction contributions.
Employee: $19,500 in 2020 and in 2021.
Participants age 50 or over can make
additional contributions up to $6,500 in
2020 and in 2021.
Employer/Employee Combined: Up
to the lesser of 100% of compensation
(1)
or $57,000 for 2020 and $58,000 for
2021. Employer can deduct (1) amounts
that do not exceed 25% of aggregate
compensation for all participants and (2)
all salary reduction contributions.
Employee: Employee: $19,500 in 2020
and in 2021. Participants age 50 or over
can make additional contributions up to
$6,500 in 2020 and in 2021.
Employer/Employee Combined: Up
to the lesser of 100% of compensation
(1)
or $57,000 for 2020 and $58,000 for
2021. Employer can deduct (1) amounts
that do not exceed 25% of aggregate
compensation for all participants and (2)
all salary reduction contributions.
Annually determined contribution.
Contributor’s
Options
Employee can decide how much
to contribute at any time.
Employer can decide whether
to make contributions year-to-
year.
Employee can decide how much
to contribute. Employer must
make matching contributions
or contribute 2% of each
employee’s compensation.
Employer makes contribution as
set by plan terms.
Employee can decide how much
to contribute based on a salary
reduction agreement. The employer
must make either specified matching
contributions or a 3% contribution to
all participants.
Employees, unless they opt otherwise,
must make salary reduction contributions
specified by the employer. The employer
can make additional contributions,
including matching contributions as set
by plan terms.
Employee can decide how much to
contribute based on a salary reduction
agreement. The employer can make
additional contributions, including
matching contributions as set by plan
terms.
Employer generally required to make
contribution as set by plan terms.
Minimum
Employee
Coverage
Requirements
There is no requirement. Can be
made available to any employee.
Must be offered to all
employees who are at least 21
years old, employed by the
employer for 3 of the last 5
years and had compensation of
$600 for 2020 and $650 for 2021.
Must be offered to all employees
who have compensation of at
least $5,000 in any prior 2 years,
and are reasonably expected
to earn at least $5,000 in the
current year.
Generally, must be offered to all
employees at least 21 years old
who worked at least 1,000 hours in
a previous year.
Generally, must be offered to all
employees at least 21 years old who
worked at least 1,000 hours in a
previous year.
Generally, must be offered to all
employees at least 21 years old who
worked at least 1,000 hours in a previous
year.
Generally, must be offered to all
employees at least 21 years old who
worked at least 1,000 hours in a previous
year.
Generally, must be offered to all
employees at least 21 years old who
worked at least 1,000 hours in a
previous year.
Withdrawals,
Loans &
Payments
Withdrawals permitted anytime
subject to federal income taxes;
early withdrawals subject to
an additional tax (special rules
apply to Roth IRAs). Participant
loans are not permitted.
Withdrawals permitted anytime
subject to federal income taxes;
early withdrawals subject to
an additional tax. Participants
cannot take loans from their
SEP–IRAs.
Withdrawals permitted anytime
subject to federal income taxes;
early withdrawals subject to
an additional tax. Participants
cannot take loans from their
SIMPLE IRAs.
Withdrawals permitted after a
specified event occurs (retirement,
plan termination, etc.) subject
to federal income taxes. Plan
may permit loans and hardship
withdrawals; early withdrawals
subject to an additional tax.
Withdrawals permitted after a
specified event occurs (retirement,
plan termination, etc.) subject
to federal income taxes. Plan
may permit loans and hardship
withdrawals; early withdrawals
subject to an additional tax.
Withdrawals permitted after a specified
event occurs (retirement, plan
termination, etc.) subject to federal
income taxes. Plan may permit loans and
hardship withdrawals; early withdrawals
subject to an additional tax.
Withdrawals permitted after a specified
event occurs (retirement, plan
termination, etc.) subject to federal
income taxes. Plan may permit loans and
hardship withdrawals; early withdrawals
subject to an additional tax.
Payment of benefits after a
specified event occurs (retirement,
plan termination, etc.). Plan may
permit loans; early withdrawals
subject to an additional tax.
Vesting
Contributions are immediately
100% vested.
Contributions are immediately
100% vested.
All contributions are
immediately 100% vested.
May vest over time according to
plan terms.
Employee salary reduction
contributions and all safe harbor
employer contributions are
immediately 100% vested. Some
employer contributions may vest over
time according to plan terms.
Employee salary reduction contributions
are immediately 100% vested. Employer
contributions may vest over time
according to plan terms.
Employee salary reduction contributions
are immediately 100% vested. Employer
contributions may vest over time
according to plan terms.
May vest over time according to plan
terms.
Payroll Deduction IRAs
Even if an employer doesn’t want to adopt a retirement
plan, the employer can allow its employees to contribute
to an IRA through payroll deductions, providing a simple
and direct way for employees to save. In this type of
arrangement, the employee always makes the decisions
about whether, when, and how much to contribute to the
IRA (up to $6,000 for 2020 and for 2021, and $7,000 for
2020 and for 2021 if age 50 or older, increasing thereafter).
Some individuals eligible to contribute to an IRA wait
until the end of the year to set aside the money and
then nd that they don’t have sufcient funds to do so.
Payroll deductions allow employees to plan ahead and
save smaller amounts each pay period. Payroll deduction
contributions are tax-deductible by the employee, to the
same extent as other IRA contributions.
Simplified Employee Pensions (SEPs)
A SEP plan allows employers to set up SEP IRAs for
themselves and each of their employees. Employers
generally must contribute a uniform percentage of pay
for each employee, although they do not have to make
contributions every year. Employer contributions are
limited to the lesser of 25 percent of pay or $57,000 for
2020 and $58,000 for 2021. (Note: the dollar amount is
indexed for ination and may increase.) Most employers,
including those who are self-employed, can establish a SEP.
SEPs have low start-up and operating costs and can be
established using a two-page form (Form 5305-SEP). And
you can decide how much to put into a SEP each year –
offering you some exibility when business conditions vary.
SIMPLE IRA Plans
A SIMPLE IRA plan is a savings option for employers
with 100 or fewer employees.
This plan allows employees to contribute a percentage
of their salary each paycheck and requires employer
contributions. Under SIMPLE IRA plans, employees can
set aside up to $13,500 in 2020 and in 2021 ($16,500 in
2020 and in 2021 if age 50 or older) by payroll deduction
(subject to cost-of-living adjustments in later years).
Employers must either match employee contributions
dollar for dollar – up to 3 percent of an employee’s
compensation – or make a xed contribution of 2 percent
of compensation for all eligible employees, even if the
employees choose not to contribute.
If your plan provides for it, you can choose to
automatically enroll employees in SIMPLE IRA plans as
long as the employees are allowed to choose not to have
salary reduction contributions made to their SIMPLE
IRAs or to have salary reduction contributions made in a
different amount.
SIMPLE IRA plans are easy to set up. You ll out a short
form to establish a plan and ensure that SIMPLE IRAs (to
hold contributions made under the SIMPLE IRA plan) are
established for each employee. A nancial institution can
do much of the paperwork. Additionally, administrative
costs are low.
You may have your employees set up their own SIMPLE IRAs
at a nancial institution of their choice or have all SIMPLE
IRAs maintained at one nancial institution you choose.
Employees can decide how and where the money will be
invested, and keep their SIMPLE IRAs even when they
change jobs.
Profit Sharing Plans
Employer contributions to a prot sharing plan can be
discretionary. Depending on the plan terms, there is often no
set amount that an employer needs to contribute each year.
If you do make contributions, you will need to have
a set formula for determining how the contributions
are allocated among plan participants. The funds are
accounted separately for each employee.
Prot sharing plans can vary greatly in their complexity.
Many nancial institutions offer prototype prot sharing
plans that can reduce the administrative burden on
individual employers.
401(k) Plans
401(k) plans have become a widely accepted retirement
savings vehicle for small businesses. An estimated 58
million U.S. workers participate in 401(k) plans that have
total assets of about $5.6 trillion.
With a 401(k) plan, employees can choose to defer
a portion of their salary. So instead of receiving that
amount in their paycheck today, the employees can
contribute the amount into a 401(k) plan sponsored by
their employer. These deferrals are accounted separately
for each employee. Deferrals are made on a pretax basis
but, if the plan allows, the employee can choose to make
them on an after-tax (Roth) basis. Many 401(k) plans
provide for employer matching or other contributions.
The Federal Government and most state governments do
not tax employer contributions and pretax deferrals (plus
earnings) until distributed.
Like most prot sharing plans, 401(k) plans can vary
signicantly in their complexity. However, many nancial
institutions and other organizations offer IRS pre-approved
401(k) plans, which can greatly lessen the administrative
burden of establishing and maintaining these plans.
Safe Harbor 401(k) Plans
A safe harbor 401(k) plan is intended to encourage plan
participation among rank-and-le employees and to
ease the administrative burden by eliminating the tests
ordinarily applied under a traditional 401(k) plan. This
plan is ideal for businesses with highly compensated
employees whose contributions would be limited in a
traditional 401(k) plan.
A safe harbor 401(k) plan allows employees to contribute a
percentage of their salary each paycheck and requires employer
contributions. In a safe harbor 401(k) plan, the mandatory
employer contribution is always 100 percent vested.
Automatic Enrollment 401(k) Plans
Automatic enrollment 401(k) plans can increase plan
participation among rank-and-le employees and make
it more likely that the plan will pass the tests ordinarily
required under a traditional 401(k) plan. Some automatic
enrollment 401(k) plans are exempt from the testing.
This type of plan is for employers who want a high level
of participation, and who have highly compensated
employees whose contributions might be limited under a
traditional 401(k) plan.
Employees are automatically enrolled in the plan and
contributions are deducted from their paychecks, unless
they opt out of contributing after receiving notice from the
plan. There are default employee contribution rates, which
may rise incrementally over the rst few years, although
the employee can choose different amounts.
Association Retirement Plans
In addition, you can join with other employers in your
geographic area or industry to offer a dened contribution
retirement plan, such as a 401(k), to your employees.
Certain working owners without other employees
(including sole proprietors) also can join. These
Association Retirement Plans (ARPs) help groups of
small employers and working owners obtain economies
of scale for administrative costs and investment choices
currently enjoyed by large businesses. The employer
group or association would act as plan administrator and
would assume most of the responsibilities in operating the
plan, allowing you to keep more of your day-to-day focus
on managing your business.
Defined Benefit Plans
Some employers nd that dened benet plans offer
business advantages. For instance, businesses can
generally contribute (and therefore deduct) more each
year than in dened contribution plans. In addition,
employees often value the xed benet provided by this
type of plan and can often receive a greater benet at
retirement than under any other type of retirement plan.
However, dened benet plans are often more complex
and, likely, more expensive to establish and maintain than
other types of plans.
To Find Out More…
The following jointly developed publications are available
for small businesses on the DOL and IRS websites and
through DOL’s toll-free number listed below:
401(k) Plans for Small Businesses
(Publication 4222)
Automatic Enrollment 401(k) Plans for Small
Businesses (Publication 4674)
Payroll Deduction IRAs for Small Businesses
(Publication 4587)
Prot Sharing Plans for Small Businesses
(Publication 4806)
SEP Retirement Plans for Small Businesses
(Publication 4333)
SIMPLE IRA Plans for Small Businesses
(Publication 4334)
For business owners with a plan:
Adding Automatic Enrollment to Your 401(k)
Plan (Publication 4721)
Retirement Plan Correction Programs
(Publication 4224)
DOL
website
Publications request number: 866-444-3272
IRS website
Also available from the U.S. Department of Labor:
DOL sponsors an interactive website – the Small
BusinessRetirement Savings Advisor
– that encourages
small business owners to choose the
appropriate retirement plan for their business and
provides resources on maintaining plans.
Publications for small businesses:
Meeting Your Fiduciary Responsibilities
Understanding Retirement Plan Fees and Expenses
Selecting an Auditor for Your Employee Benet Plan
Selecting and Monitoring Pension Consultants – Tips for
Plan Fiduciaries
Tips for Selecting and Monitoring Service Providers for
Your Employee Benet Plan
Also available from the Internal Revenue Service:
Retirement Plans for Small Business (SEP, SIMPLE, and
Qualied Plans) (Publication 560)
Contributions to Individual Retirement Arrangements
(IRAs) (Publication 590-A)
Distributions from Individual Retirement Arrangements
(IRAs) (Publication 590-B)
Designated Roth Accounts Under 401(k), 403(b), or
Governmental 457(b) Plans (Publication 4530)
