There are a lot of excellent retirement plan options for businesses. But unfortunately, people often get more concerned about the overall best retirement plan type and spend less time focusing on the pros and cons that make each option unique. There are several retirement plan types to consider. Each type has its benefits and drawbacks. Let's jump into the differences.

Here are the most common types of business retirement plans:

In the chart above, we are including IRAs for illustrative purposes.

Simplified Employee Pension Plan (SEP IRA)

A SEP IRA is an individual retirement account (IRA) that allows small business owners to make tax-deductible contributions for themselves and their employees. Contributions are immediately vested and are limited to a percentage of the employee's compensation. SEPs are easy to set up and maintain, with no annual filing requirements.

A SEP IRA can make sense when there is no need for individual employees or owners to make a personal contribution to their retirement plan. This is because all contributions come from the business. 

Eligibility

Employees must be included if they are 21 or older, worked for the business 3 in the last five years, and received at least $750 in 2022.

Pros:

• Easy to set up and maintain

• High contribution limits (up to 25% of compensation, with a cap of $66,000 in 2023)

• Contributions are immediately vested

Cons:

• Contributions are solely the employer's responsibility

• No catch-up contributions for employees over age 50

• No loan provisions

• Limited eligibility criteria

Savings Incentive Match Plan for Employees IRA (SIMPLE IRA)

A SIMPLE IRA is another type that allows small businesses to offer a retirement plan to their employees. Like a SEP IRA, contributions are tax-deductible and immediately vested. However, a SIMPLE IRA has lower contribution limits than a SEP IRA and requires the employer to match employee contributions up to a certain percentage.

Unlike the SEP IRA, SIMPLE IRAs allow participant contributions, not just employer contributions. This will enable employees to also contribute from their income. In addition, just like SEP IRAs, SIMPLE IRAs have limited eligibility requirements.

Eligibility

Employees must be included if they are 21 or older, worked for the business 3 in the last five years, and received at least $750 in 2022.

Pros:

• Easy to set up and maintain

• Lower administrative costs than other plans

• Employees can make contributions through payroll deduction

• Catch-up contributions for employees over age 50

Cons:

• Employer contributions are mandatory

• Lower contribution limits than a 401(k) plan

• 25% tax penalty for withdrawals made within two years from when participants first participated in the SIMPLE IRA

• Low contribution limits of $15,500 in 2023

• Companies are ineligible to adopt a SIMPLE IRA if they have more than 100 employees that make more than $5,000

401(k) Plan

A 401(k) plan is a popular retirement plan that allows employees to contribute a portion of their pre-tax income to a retirement account. Employers can also make contributions on behalf of their employees. A 401(k) plan offers higher contribution limits than a SEP IRA or SIMPLE IRA and can also include a Roth option, which allows employees to make after-tax contributions.

We have seen many employers misunderstand how 401(k) plans work. Often employers think they need to have a certain amount of employees to start a plan, believe they need to match, or think there is a lot of extra work associated with 401(k) plans. 

Eligibility

The main eligibility requirements are employees aged 21 or over and at least one year of service. 

Pros:

• Higher contribution limits than a SEP IRA or SIMPLE IRA (up to $22,500 in 2023, with a catch-up contribution of $6,500 for employees over age 50)

• Employer contributions are optional.

• Roth option available

• Loans available to participants

• Vesting schedules are optional.

Cons:

• More complex and expensive to administer than a SEP IRA or SIMPLE IRA

• More administrative and compliance responsibilities for the employer

• Higher administrative costs than other plans

Profit-Sharing Plan

A profit-sharing plan is a type of retirement plan that allows employers to make contributions to their employee's retirement accounts. Contributions are discretionary and can vary from year to year. Profit-sharing plans can be paired with other retirement plans, such as a 401(k) plan, to provide additional retirement savings opportunities.

Pros:

• Flexibility in contribution amounts, which can be adjusted based on company profits

• Employer contributions are discretionary

• Can be paired with a 401(k) plan to provide additional savings opportunities

Cons:

• Contributions are not guaranteed and can vary from year to year

• Less flexibility in plan design than in a 401(k) plan

Defined Benefit Plan

A defined benefit plan is a type of retirement plan that provides a fixed retirement benefit to employees based on a formula that considers their years of service and salary. Defined benefit plans are more complex and expensive to administer than other retirement plans, but they offer the highest contribution limits and provide a guaranteed retirement benefit.

Each type of retirement plan has unique features and advantages, so it's essential to carefully evaluate each option and consult a financial advisor to determine which plan is best for your business and employees.

Pros:

• Highest potential contribution limits of any retirement plan

Cons:

• More complex and expensive to administer than other retirement plans

• Employer contributions may be mandatory and determined by a formula based on employee compensation and years of service

Conclusion

This blog post scratches the surface of what retirement plans are available to employers. There are more considerations, including plan design. It would help if you worked with a professional to know what makes the most sense for your company. 

If you need help reviewing your 401(k) plan, consider scheduling a consultation with our team. We can help you review your retirement plan options. Though CUI Wealth Management is in Salt Lake City, Utah, we serve clients in many states. Please see the website footer for a complete list of states we serve.