Retirement Plans for Small Business: 401(k), SIMPLE IRA or SEP IRA

Retirement is the benefit small employers are furthest behind on, which is exactly why it is the cheapest way to stand out. Retirement benefits reach about 72% of private industry workers overall, but only around 59% at establishments under 100 employees, against roughly 90% at employers over 500 (Bureau of Labor Statistics).

There is also a decent chance the decision is no longer entirely yours. As of April 2026, 22 states had enacted state-facilitated retirement programs for private-sector workers, and in California, Oregon and Hawaii the threshold is as low as one employee.

So the question is usually not whether to offer retirement plans for small business staff, but which of three structures to use. This guide compares them on the things that actually differ: what they cost to run, who you are obliged to cover, and what you must contribute. Where it fits in the wider package is covered in the guide to small business employee benefits, and the budget maths against health coverage and time off is in the real cost of employee benefits.

Key Takeaways

• For 2026, employees can contribute $24,500 to a 401(k) and $17,000 to a SIMPLE IRA. A SEP IRA takes employer money only, up to 25% of compensation and a $72,000 cap.
• SECURE 2.0 covers 100% of plan start-up costs up to $5,000 a year for three years for employers with 50 or fewer employees, up to $15,000 of credit.
• A separate credit of up to $1,000 per employee earning $100,000 or less can offset your employer contributions.
• State auto-IRA programs satisfy a mandate but cap contributions near $7,500 for 2026 and do not permit an employer match.
• SIMPLE IRAs require you to contribute every year, either a 3% match or 2% for everyone eligible. A 401(k) match is optional.

The three options at a glance

The short version: SEP for owner-heavy businesses with few or no employees, SIMPLE for small teams wanting employee deferrals without administration, 401(k) when you want the highest limits, a flexible match and room to grow.

SEP IRA: cheapest to run, but you fund all of it

A SEP IRA is funded entirely by the employer. Employees cannot defer their own pay into it at all.

The mechanics:

• Contribution limit. Up to 25% of eligible compensation, capped at $72,000 for 2026.
• Uniformity requirement. The same percentage of compensation must go to every eligible employee, including you. Give yourself 20%, and everyone eligible gets 20%.
• Setup and admin. Minimal. No annual Form 5500 filing, and most providers will open one quickly.
• Flexibility. You decide the percentage each year, including zero in a bad year. That matters for a seasonal business.

The uniformity rule is what decides this. For a sole proprietor or an owner with one or two staff, a SEP is excellent: low cost, high limits, no paperwork. Add six drivers and the same rule becomes expensive: you cannot fund your own retirement generously without funding theirs at the same rate.

It also does nothing for the retention problem, because employees cannot save their own money into it. As a benefit people value, it is the weakest of the three.

SIMPLE IRA: built for small teams, with a mandatory contribution

A SIMPLE IRA is designed for exactly this scale, up to 100 employees, and it lets employees defer their own pay without the administrative load of a 401(k).

For 2026:

• Employee deferral limit of $17,000, or $21,000 from age 50. Under SECURE 2.0, employees turning 60 through 63 have a higher catch-up, $5,250 rather than $4,000.
• Employer contribution is mandatory, every year, in one of two forms: match employee deferrals up to 3% of compensation, or contribute 2% of compensation for every eligible employee whether they defer or not.
• No annual filing. No Form 5500, and no nondiscrimination testing.
• Setup cost is typically negligible.

The mandatory contribution is the trade-off, and it is worth running the numbers on. The 3% match only costs you for people who participate. The 2% nonelective costs you for everyone eligible regardless — on a $45,000 salary that is $900 a year per person, paid even to someone who contributes nothing.

Two constraints to know: you generally cannot run a SIMPLE IRA alongside another retirement plan in the same year, and switching out of one mid-year is restricted. For a business expecting to grow past 100 people, that rigidity is a reason to look at a 401(k) sooner rather than later.

401(k): highest limits, most administration

A 401(k) is the full-featured option, and SECURE 2.0 made it considerably cheaper to start than it used to be.

For 2026:

• Employee deferral limit of $24,500, plus $8,000 catch-up from age 50, and $11,250 for employees turning 60 through 63.
• Employer match is optional and you design it. A 3% to 4% match is common; many small employers start at 2%.
• Administration is real. Expect setup costs of several hundred to a couple of thousand dollars, annual administration in the $1,000 to $3,000 range or more, an annual Form 5500, and nondiscrimination testing unless you use a safe harbour design.
• Safe harbour designs avoid testing in exchange for a required contribution, commonly a 4% match or a 3% nonelective contribution, and they remove the risk of having to refund your own deferrals because not enough staff participated.

The limits matter more than they first appear if you are an owner trying to save meaningfully. The gap between $24,500 and $17,000 of personal deferral is $7,500 a year of tax-advantaged room. For an owner over 50, the gap widens further.

Also worth knowing: long-term part-time employees now earn eligibility to make deferrals after sustained part-year service, which is relevant if you keep drivers on consistent part-time hours year after year. Confirm the current rule with your provider when you set the plan up. It is the eligibility detail small employers most often miss, and it works much like the hours-based thresholds that govern health insurance options when hours change week to week.

State retirement mandates you may already be subject to

State mandates are what turn a nice-to-have into a deadline.

As of April 2026, 22 states had enacted state-facilitated retirement programs, with Utah and Mississippi joining during 2026. The structure is generally an auto-IRA: if you do not offer a qualifying plan, you must enrol your employees in the state program, with employees auto-enrolled and free to opt out.

Thresholds vary and they are low:

• One employee in California, Oregon and Hawaii.
• Five or more in Colorado, Connecticut, Delaware, Maine, Minnesota and Virginia.
• Other states set their own thresholds and phase-in dates by employer size.

State auto-IRAs do satisfy the mandate, and they are simple to administer. The limitations are worth weighing before defaulting to one:

• Lower contribution limits. Roughly $7,500 for 2026, against $24,500 in a 401(k).
• No employer match permitted. You cannot use it to compete on benefits, only to comply.
• No tax credit for you, since the SECURE 2.0 start-up credits attach to establishing your own plan.

For many small employers the arithmetic favours opening a SIMPLE IRA or a 401(k) instead of enrolling in the state program: you get the credits, a far higher limit for yourself, and something you can actually mention when hiring. Check your state’s current threshold and deadline, since several have phased in by employer size over successive years (Gusto’s state mandate tracker is a reasonable starting point, but confirm against your state program directly).

The SECURE 2.0 credits that pay for the plan

These credits are the reason “we cannot afford a retirement plan” is weaker than it was a few years ago.

• Start-up cost credit. For employers with 50 or fewer employees, 100% of eligible start-up costs up to $5,000 a year for the first three years, up to $15,000 total. Between 51 and 100 employees the credit covers 50%.
• Employer contribution credit. Up to $1,000 per employee earning $100,000 or less in the prior year, applied to your contributions, phasing down over five years.
• Auto-enrolment credit. An additional credit of $500 a year for three years for adding an eligible automatic enrolment feature.

Read the first one carefully, because it is widely misunderstood: it offsets the cost of establishing and administering the plan, not your contributions to it. The contribution credit is the separate one.

Taken together, a small employer can often get the first three years of plan administration covered and a meaningful share of contributions offset. That changes the comparison against a state auto-IRA considerably, and it is worth asking a provider to quote the credits alongside their fees rather than estimating.

How to choose, in order

1. Check your state mandate first. It may set your deadline, and it determines whether doing nothing is still an option.

2. Count your employees and your own saving goal. No employees, or just a spouse: SEP. A small team and you want simplicity: SIMPLE. You want to defer meaningfully yourself or expect to grow: 401(k).

3. Price the mandatory contribution. For a SIMPLE, calculate both the 3% match and the 2% nonelective against your actual payroll and participation. They can differ substantially.

4. Get the credits quoted. Ask providers to show the SECURE 2.0 start-up credit against their fee schedule for years one to three.

5. Decide eligibility deliberately. Hours thresholds, waiting periods, and how long-term part-time staff are treated. Write it down, the same way you would for paid time off accrual.

6. Tell people it exists. A plan with 20% participation is not the benefit you paid for. Announce it at hiring, explain the match in dollars rather than percentages, and repeat it annually, the same discipline that makes a wellness program get used rather than ignored.

Frequently asked questions

What is the best retirement plan for a small business?

It depends on headcount and your own saving goal. A SEP IRA suits owners with no employees. A SIMPLE IRA suits small teams wanting employee deferrals with minimal admin. A 401(k) suits employers who want the highest limits, a flexible match, and room to grow.

What is the difference between a SIMPLE IRA and a SEP IRA?

Employees can contribute to a SIMPLE IRA, up to $17,000 for 2026, and the employer must match 3% or contribute 2% for everyone eligible. A SEP IRA takes employer money only, up to 25% of compensation and $72,000 for 2026, and the same percentage must go to every eligible employee.

How much does it cost a small business to set up a 401(k)?

Typically several hundred to a couple of thousand dollars to set up, plus $1,000 to $3,000 or more a year in administration. SECURE 2.0 covers 100% of eligible start-up costs up to $5,000 a year for three years for employers with 50 or fewer employees.

Does my state require me to offer a retirement plan?

Possibly. As of April 2026, 22 states had enacted state-facilitated programs, with thresholds as low as one employee in California, Oregon and Hawaii, and five in several others. Check your state program directly for the current threshold and deadline.

Do part-time employees have to be included in a retirement plan?

Often yes, depending on the plan type and sustained hours over multiple years. If you keep drivers on consistent part-time schedules year after year, confirm the current long-term part-time eligibility rule with your provider before setting your plan’s terms.

The first call to make

Look up your state’s threshold and deadline, then ask one provider to quote a SIMPLE IRA and a 401(k) side by side, with the SECURE 2.0 start-up credit applied to years one through three.

Most owners who assume a retirement plan is out of reach have never seen that comparison with the credits in it. It frequently costs less in the first three years than the health insurance line it is competing with.