Offering a retirement plan can be a great way to attract talented employees to your small business and keep them there. The type of plan you choose will impact the financial health of those employees, so selecting the right one is critical. Two popular options are the Savings Incentive Match Plan for Employees Individual Retirement Account, typically called SIMPLE IRA, and the 401(k). Which one is right for your business?

In this blog post, we’ll dive into the pros and cons of each plan to help you make an informed decision that aligns with the needs, goals, and resources of your business and the people who keep it running.

A SIMPLE IRA plan allows employees and employers to contribute to traditional IRAs set up for employees. The Internal Revenue Service says the SIMPLE IRA is ideally suited as a start-up retirement savings plan for small employers not currently sponsoring a retirement plan. So, what benefits and challenges should you take into consideration?

Easy to Implement

Setting up a SIMPLE IRA is straightforward. Employers must select a financial institution to manage the accounts, complete IRS Form 5304-SIMPLE or 5305-SIMPLE, and set up individual accounts for employees. Annual notifications about contributions and plan details are required. Notify each eligible employee when you establish the SIMPLE IRA and every year thereafter about their opportunity to make or change salary reduction change.

Cost-Effective

SIMPLE IRA plans do not have the start-up and operating costs conventional retirement plans do, which could do your budget a big favor. While 401(k)s require fees to pay for services like recordkeeping, asset custody, and third-party administration, SIMPLE IRAs do not. Employees fund the plan through annual salary reduction contributions, called elective deferrals, and you – as the employer – can choose 2% nonelective contributions or 3% matching contributions.

Immediate Vesting

Because there is no vesting period with a SIMPLE IRA, your employees have 100% ownership of all the money in their retirement account. Employees may elect to contribute or not if you’re making nonelective contributions. If an employee leaves your company, they can also take their contributions with them – an aspect that may give them confidence in your plan and the way you run your business.

Tax Benefits

As a small business owner, you may be eligible for a tax credit of up to $500 per year for the first three years for the cost of starting a SIMPLE IRA plan. All your contributions are tax-deductible, and your employees’ contributions and earnings grow tax-deferred and are not taxed until they are withdrawn. Reducing your tax burden can be a big advantage, especially as you’re trying to build your business.

Contribution Caps

The amount an employee contributes from their salary to a SIMPLE IRA cannot exceed $16,500 for 2025. Your contributions as the employer, whether the 2% nonelective contribution or 3% match, do not count toward that limit. The cap could be a drawback for employees who want to maximize their retirement savings.

Limited Investment Choices

Investment options available to your employees will depend on which institution holds the SIMPLE IRA, regardless of whether you or the employee choose that institution. This means employees might have less flexibility to create tailored portfolios.

Fewer Plan Features

401(k)s may offer loan options, hardship withdrawals, and catch-up contributions for employees over age 50, but SIMPLE IRAs do not.

Not for Larger Businesses

Simple IRAs are only available to businesses with 100 or fewer employees. If you grow beyond those numbers, you’ll need to explore another retirement savings option.

If you’re running a business that has – or is projected to have – more than 100 employees, or you are looking for a retirement plan with more flexibility, features, and investment choices for employees, a 401(k) might be a better choice for you. Let’s look at this plan’s pros and cons.

Higher Contribution Limits

401(k) plans have appreciably higher contribution limits, which is a clear advantage for employees looking to save more – or more quickly – for retirement. In 2025, the amount individuals could contribute to their 401(k) plans increased to $23,500.

Diverse Investment Options

A 401(k) typically allows employees to choose from various stocks, bonds, mutual funds, and other options, giving them more control over their portfolios and the potential for higher returns based on the level of risk they’re willing to take on.

No Business Size Restrictions

There are no restrictions on the number of employees you can have on a 401(k) plan, so you won’t need to change plans as your business grows.

Setup and Administration Can Be Complex

More time, expertise, and resources are required to set up and manage a 401(k) versus a SIMPLE IRA. The time and cost associated with setting up a 401(k) will depend on your business size, plan design, and the extent to which your employers will make contributions.

Costs Are Higher Than a SIMPLE IRA

If, as a small business owner, you have limited human resources or financial department staff, you may need to hire external administrators, which will cost you more. Fees also vary by plan and might be high for a small business.

Ownership is Gradual

Unlike SIMPLE IRAs, one downside of 401(k) plans is that employers’ contributions may be subject to vesting schedules. This means employees must stay with your company for a certain period before they have full ownership of those funds, which could deter some potential employees.

Choosing the right retirement plan for your business will impact your bottom line and your employees’ financial future. The right plan will depend on your business’s current size, your growth trajectory, and your employees’ needs and savings goals.

 

Select a retirement plan that helps attract and retain top talent and contributes to your company’s financial stability and success. When you’re ready to talk more about your business retirement plan options, we can help.

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