Frequently asked questions

While the Center for Retirement Research found more than half of small businesses estimated a retirement plan would cost them more than $10,000 a year, the Center suggested actual costs for a 401(k) could be $2,500 for a firm with 10 employees.* And other plan types can be even less expensive.

Financial professionals who work with retirement plans can help with every part of the journey. Here’s a few of the ways a financial professional can help: The total cost of a retirement plan depends on a few factors. Generally, a SEP IRAs or aSIMPLE IRAs costs less than a 401(k), because these plans have fewer features. Once you've picked a plan, there are a few different costs you'll have to pay:

Recordkeeping fees: Fees paid to your retirement plan recordkeeper  that cover services including tracking contributions and balances, issuing statements to participants, and generally providing the platform for the plan.

Financial professional fees: The fees paid to your plan's financial professional, if you have one, for services like reviewing the investments in your plan or educating participants. Your financial professional may be paid out of investment expenses (see below).

Administration fees: Fees paid to your plan administrator, if you have one, for things like compliance testing and plan document design.

Investment management fees: The expense ratios of the investment products in your plan. These are paid by participants out of their investments. In some cases, a portion of these fees may be used to pay service providers as well.

You also have options to make a plan even more affordable:

• Take advantage of SECURE 2.0 tax credits: For a new plan, you can get up to $5,000 in tax credits for your plan costs, plus more credits for employer contributions. Learn more about tax credits here. You can also see more information in the tax credit FAQ below.
• Share costs with participants: You may be able to have a portion of the recordkeeping fees paid from participant accounts, or choose investments that include fees for service providers.

Footnote/Important information: 

* Source: Small Business Retirement Plans: How Firms Perceive Benefits & Costs, Center for Retirement Research at Boston College, March 2024.  

Financial professionals who work with retirement plans can help with every part of the journey. Here’s a few of the ways a financial professional can help:

Plan selection: They can help educate you on the different plan types available and guide you to the plan type that best fits your business. They can also help select service providers like the recordkeeper or third-party administrator. 
 

Plan set-up: They can work with you and your service providers to design the plan around your business, and help handle communications with your employees.
 

Investment selection: They can help you choose the products for your plan menu, as well as review those investments to make sure participants have enough options, the funds are performing well and that the fees are reasonable. Some financial professionals can also take over responsibility for picking and monitoring investments. 
 

Participant engagement: A financial professional can help make sure your employees are benefiting from the plan. For example, they can conduct enrollment meetings to get employees started or educate participants on the plan’s investment options and the importance of saving. 
 

Maintenance: They can also help you with running the plan going forward, including by reviewing the plan’s fees and other service providers.
 

If you already work with a financial professional (you may know them as your financial advisor, broker or financial planner), ask them if they have experience with small business retirement plans.

Need help finding someone? Take a look at our guide for more information on what questions to ask when you’re evaluating providers.

The SECURE 2.0 Act passed in 2022 included a number of provisions aimed at encouraging businesses to offer retirement plans. In particular, the Act expanded existing tax credits and added new credits for businesses with up to 100 employees* that haven’t offered a retirement plan in the last three years.
 

Tax credits directly reduce your final tax bill, saving your business money. There’s three credits you may be able to take advantage of:

Startup plan costs: You can claim a credit of up to $5,000 per year, depending on how many employees you have, for startup plan costs including plan setup and administration fees in the first three years of your plan.
 

Automatic enrollment: If you automatically enroll your employees in your plan (required for most new 401(k) plans), you can claim $500 per year for the first three years. 
 

Employer contributions: If you contribute to employees’ accounts, you can claim up to $1,000 per employee* for those contributions for the first five years of your plan. The amount you can claim starts at 100% of your contributions but reduces each year (plus a 2% reduction for each employee exceeding the 50-employee limit).

Learn more about the tax credits here.

In addition to the tax credits above, contributions you make to employees’ accounts may be tax deductible, helping to reduce your taxable income each year.

Footnote/Important information: 

*Employees who received compensation of $5,000 or more in the preceding year. Credit applies to contributions made for employees earning less than $110,000 per year (indexed for inflation).  

Whether you’re required to contribute depends on the plan type.

SEP IRA: Optional, but only you can contribute to plan accounts — not employees. When you do contribute, it has to be the same percentage of pay for every participant.

SIMPLE IRA: Required, but at a low rate and you have some flexibility. Either:

• 2% nonelective contribution to every employee
• 3% match, only paid to employees who contribute
  

You can also choose to cut the match down to 1% for up to two out of every five calendar years if you need to (say, during leaner times).
 

401(k): Optional, unless you structure the plan as a safe harbor 401(k) in order to make annual compliance requirements easier. You can also set a vesting schedule, so if employees leave your company after a short time you get part of your contributions back.
 

Also keep in mind that you may be eligible for a tax credit for your contributions in the first five years of your plan — up to $1,000 per employee. Learn more about the tax credits here or in the FAQ above. Contributions you make to employees’ accounts may also be tax deductible, potentially reducing your taxable income; learn more in the tax deduction FAQ below.

In one survey from the Center for Retirement Research, more than half of small businesses thought plan administration would take two or more days each month. In reality, the survey estimated that after initial set-up most plans only take a few hours a year to administer.*

If you offer a 401(k), you’ll need to make filings like Form 5500, provide disclosures and annual notices to eligible employees and complete what’s called nondiscrimination testing to stay afloat of retirement plan rules from the IRS and Department of Labor. But your plan’s administrator can handle most or all of that work for you. 401(k)s can also skip the annual testing if they’re structured as a safe harbor plan (ask your financial professional for details).

Looking for something easier? SEP IRAs have less maintenance and don’t require any annual filings or disclosures. SIMPLE IRAs only require one annual notice.

You may also want to review the investments in your plan annually to make sure they’re appropriate, and check that your service provider and investment fees are reasonable. A plan financial professional can help with those tasks.

Footnote/Important information: 

* Source: Small Business Retirement Plans: How Firms Perceive Benefits & Costs, Center for Retirement Research at Boston College, March 2024.

There’s no federal requirement to offer a retirement plan, but a growing number of states do have retirement plan mandates that require businesses over a certain size to join a state-run retirement program if they don’t have a plan of their own.

The state-run plans are typically free for employers to join, and automatically enroll employees at a default contribution rate. But the plans also typically have lower contribution limits for employees and don’t allow employer contributions. Businesses can opt out by offering a qualified retirement plan plan like a SEP IRA, SIMPLE IRA or 401(k). If a business doesn’t either enroll workers in the state plan or offer its own plan, it could face financial penalties.

For example, in California any business with at least one employee has to either offer its own retirement plan or enroll employees in the CalSavers plan. Businesses that don’t comply could face penalties of up to $500 per employee.

Each plan type has a different definition of which employees need to be allowed to participate, and some of those definitions could apply to part-time employees:

Payroll deduction IRA: Generally, if you offer a payroll deduction IRA to one employee, you have to offer it to every employee regardless of status. But it’s on employees to establish their own account, and only employees contribute.

SEP IRA: You have to include any employee age 21+ who has been employed in at least three of the last five years and earned $800 over that period, potentially including part-time employees.
 

SIMPLE IRA: You have to establish accounts for any employee who has earned at least $5,000 in either of the past two years and is expected to earn at least $5,000 in the current year. (If you opt for employer matching contributions, you only have to contribute to employees who actually start saving).
 

401(k): You have to allow part-time employees to participate if they have worked 500 or more hours for at least two consecutive 12-month periods. However, you can restrict employer contributions to employees who worked 1,000 or more hours in a 12-month period.

Of course, with each plan type you can decide to expand eligibility to more employees if you want.

Although the IRS says employers must intend to continue their retirement plans ‘indefinitely’ when they establish the plan, you’re allowed to terminate the plan at any time if your business closes or the plan no longer suits your needs.

To terminate the plan, you need to establish a termination date, pay any outstanding employer contributions and otherwise stop plan contributions. If it’s a 401(k) plan, any employer contributions you’ve made must be fully vested on the termination date, even if the employee hasn’t reached the end of the vesting schedule. You may need to make filings with the IRS and DOL, depending on the plan type.

You’ll also have to notify participants and beneficiaries about the upcoming termination, as well as provide a notice that they can roll their funds over to another retirement account to avoid tax penalties.

After the termination date, you’ll send participants their plan assets. Participants can then decide how to handle their savings.

If the plan is no longer working for you but you want to continue to offer retirement benefits, you can also establish a different plan type. For example, you might want to move from a SIMPLE IRA to a 401(k) if you plan to grow beyond 100 employees, or switch from a 401(k) to a SEP IRA if you want to save costs.

Visit the IRS website for more information on terminating a plan.

You generally can deduct your employer contributions from your federal income tax return, reducing your taxable income. The maximum deduction depends on the plan but is typically up to 25% of the total compensation for participants. This deduction also means it may be cheaper for you to provide bonuses as plan contributions instead of cash bonuses, since you’ll save on taxes.

The deduction is in addition to any tax credits you might qualify for; learn more about tax credits here or in the tax credit FAQ above.

Meanwhile, employee contributions are most often pretax, so employees don’t pay income taxes on whatever they contribute to the plan. Both employee and employer contributions also grow tax-exempt, so employees only pay taxes on contributions and earnings when they retire and withdraw their funds. (Tax penalties may apply if they withdraw funds early).

Some plan types also allow Roth, or after-tax, contributions. With this contribution type, employees do pay income taxes on their contributions, but then can withdraw their savings tax-free at retirement. (Again, tax penalties may apply on early withdrawals).