Have you avoided retirement plans because of the large fees and time-consuming administration? If so, I’m happy to tell you that things have changed. There are more options than ever, including a plan that has no fees or recordkeeping requirements for employers. Not to mention, you may no longer have a choice. Several states have state-mandated retirement plans that require employers to offer plans.
The focus on retirement plans might be because Social Security and small savings accounts do not provide adequate income. Retirees also need a pension or retirement plan in order to cover their expenses, yet 75% of workers do not have retirement savings plans.
- Best low-cost, easy setup: SIMPLE IRA (requires 1%–3% employer match; minimal admin).
- Best high contribution for owner-only businesses: Solo 401(k) or Defined Benefit plan (higher costs/complexity).
- Best flexible, employer-funded option: SEP IRA (employer contributes; great in profitable years).
- Best pooled solution for small teams: MEP/PEP (share admin/costs with other employers).
- Payroll + 401(k) integration tip: Choose free integrations for payroll to auto-sync contributions, reducing errors and admin time.
Overview of small business retirement plans
Take a look at the different types of available retirement plans.
IRA (Individual Retirement Account)
An IRA is an investment with tax-free benefits and can be set up in a variety of accounts (e.g., CD, mutual fund). The earnings deposited in a traditional IRA are tax free; deposits to a Roth IRA are made with earnings that have already been taxed. The withdrawals of principal or interest from a traditional IRA are taxed. Withdrawals of principal or interest from a Roth IRA are not taxed.
SIMPLE IRA Plans (Savings Incentive Match Plan for Employees)
The SIMPLE IRA gives small businesses an easy way to offer their employees a retirement savings plan. You complete an IRS form, and setup can be free, depending on the institution you select.
Any advisor fees are charged to the employee, and larger contribution amounts are allowed on this type of IRA. However, there are large penalties for early withdrawal, and employers are required to pay a matching contribution (1-3%). Employer costs are tax deductible.
SEPs (Simplified Employee Pension)
The SEPs (Simplified Employee Pension) is another easy-to-set-up retirement plan through the IRS. However, it can be costly if you have more than a couple employees. With SEPs, the employer makes all the contributions, and they are tax deductions.
So, if your business is doing well, you can share the profits with your employees by adding to the SEPs account (which can be good motivation). It also is easy to dissolve when an employee leaves.
Solo (individual) 401(k)
The Solo 401(k) works best for a self-employed individual or very small business. There are some benefits if you want to make larger contributions, but there are penalties and requirements that can be challenging if you have a bad year. Also, there will be expenses for setup and administration; however, they are lower than the types of 401(k) plans set up for a larger workforce.
- Easy onboarding with our setup wizard
- Free direct deposit
- Free USA-based support
Defined benefit plans
Defined benefit plans are less common these days, but can be a good option for the self-employed or a small business with a lot of money to contribute each year. It can be combined with other plans for even greater contributions. Costs can be high, but so are the tax deductions.
When it comes to payout, there are restrictions. For example, you must offer the plan for all employees, so when someone leaves you lose part of your capital. For this reason, it is usually a sole proprietor who selects this retirement option.
Multiple Employer Plans (MEP)
Intended for small businesses, a MEP allows multiple small businesses to band together and offer a retirement plan to employees. This partnering enables the business owners to share the prohibitive costs and tedious administration of a retirement plan–making it affordable. It also helps the employer who is not knowledgeable about retirement plan options. Currently, MEPs are only allowed for trade associations and their members.
Note: Since the SECURE Act, Pooled Employer Plans (PEPs) also let unrelated employers join a single 401(k) plan with a pooled provider to reduce administrative burden and fiduciary risk. PEPs can be a practical “plug-in” option for small teams.
Less common retirement plans
With all the different types of investments and retirement accounts to choose from, this list could get very long and detailed. And there are new retirement options cropping up all the time. In addition to the plans listed above, the IRS website also provides information about: 403(b) tax-sheltered annuity plans, Designated Roth accounts, and SARSEPs.
The IRS publication Choosing a Retirement Solution for Your Small Business contains a table that compares the features of common retirement options.
Payroll and 401(k) integration: How payroll software connects to retirement providers
If you choose a 401(k) plan, payroll integrations can automate most of the admin:
- What it does: Syncs employee demographics, compensation, and contribution data between payroll and the 401(k) provider. Also updates enrollment changes, deferral rates, and eligibility.
- Why it matters: Reduces manual entry and errors, saves time (especially with >20 employees), and supports IRS compliance testing/reporting.
Confirm which providers integrate with your payroll. For example, Patriot Software offers a streamlined 401(k) integration with Vestwell to reduce manual work.
Other retirement considerations
Before setting up a retirement plan, there are several considerations you should make.
Retirement options could improve employee retention
As a small business owner, your employee benefit package may not compete with those of larger businesses. Forbes (2013) reports that most large companies have retirement plans, but only 14% of small businesses with 10 or fewer employees, and 5% with up to 4 employees, offer any retirement options.
If you can offer a retirement plan to your employees, it could demonstrate that you care about their future, and encourage them to stay with you (turnover is expensive!). At a minimum, you could just share current information about retirement plans, the power of compound interest when you start saving in your 20s, etc.
Questions to ask yourself about offering retirement plans
When you look at retirement plans, you will want to consider a number of factors:
- What are the IRA, 401(k) contribution limits and deadlines?
- Are contributions pre-tax or post-tax deductions from payroll?
- What kind of tax break can your employees expect to get?
- What fees or recordkeeping may be required for you as the employer?
- What plans or mandates does your state currently have for employee retirement plans? (California, Illinois, Connecticut, and Oregon were the first to put plans in place.)
- What happens to an employee’s retirement plan savings if he quits and moves on to a new employer?
- What are the penalties if an employee withdraws their money and terminates their retirement plan? Can employees borrow funds from their retirement account?
- Do you think you could offer a small percent of matching funds to your employees’ contributions?
- Does your payroll support 401(k) integrations with your chosen provider, and what setup or ongoing fees apply?
Retirement plan mandates
Some states have issued mandates already which require small businesses to establish retirement plans, and the state may have set up a retirement plan the employer can use.
Many states now require certain employers to offer a retirement savings option, often an automatic-enrollment IRA program funded via payroll deductions. In most cases, businesses that already sponsor a qualified plan (e.g., 401(k), SIMPLE IRA) are exempt.
Employee education about planning for retirement
Even your youngest, part-time, and seasonal workers need to understand the importance of planning for retirement. In fact, one of the employer mandates of the impending state programs is to educate your employees. Fortunately, there are plenty of online resources.
Resources for retirement options
You can check with your accountant or financial planner when looking for retirement options. If you prefer, you can always find up-to-date information for both you and your employees on several government websites.
DOL
- Consumer Information on Retirement Plans
- Pension Protection Act
- Choosing a Retirement Solution for Your Small Business
IRS
- Help with Choosing a Retirement Plan
- Retirement Plans Frequently Asked Questions (FAQs)
- Small Business Retirement Plan Resources
SSA
How to get started with a retirement plan (simple checklist)
- Pick your plan type
- Owner-only or tiny team? Consider Solo 401(k) or SIMPLE IRA.
- Want employer-only funding flexibility? Consider SEP IRA.
- Need robust features? Consider a 401(k).
- Confirm payroll compatibility
- Ask your payroll provider which 401(k) provider(s) they integrate with
- Clarify setup steps, timelines, and correction workflows.
- Educate and enroll
- Share plan highlights, contribution limits, and vesting rules.
- Set default deferral rates if using auto-enrollment (where applicable) and schedule periodic reminders.
FAQs: Small business retirement plans and payroll integrations
Automation reduces manual entry and errors, keeps contributions and eligibility in sync, saves time, and supports compliance testing and reporting.
SIMPLE IRAs are typically low-cost and easy to set up, though they require a 1%–3% employer match. Thanks to SECURE 2.0, 401(k) plans are also inexpensive to start, thanks to business tax credits worth 100% of qualifying startup expenses up to $5,000.
You might consider solo 401(k) or a Defined Benefit plan to allow very high contributions. Solo 401(k)s typically offer more flexibility and lower admin costs than Defined Benefit plans.
Many states require employers to facilitate a retirement option (often a payroll-deduction IRA). If you already sponsor a qualified plan like a 401(k) or SIMPLE IRA, you’re generally exempt. Check your state’s program for specifics.
Yes, modern payroll systems can track and remit both pre-tax and Roth deferrals, and send the correct data to your plan provider.
Payroll deductions for employee retirement plans can be set up in your payroll software for easy computation and accurate reporting. Try Patriot’s online full-service payroll for free! Our payroll services will file and remit payroll taxes so you can focus on your business!
This article was updated from its original publication date of August 3, 2016.
This is not intended as legal advice; for more information, please click here.
