Retirement Plans for Small Businesses with Employees: SIMPLE IRA, SEP, and 401(k)

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·8 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Retirement plans for businesses with employees require balancing the owner’s desire to maximize their own tax-deferred savings with the cost of contributing for employees. The three main options, SIMPLE IRA, SEP IRA, and traditional 401(k), each handle this balance differently. A SIMPLE IRA lets employees contribute up to $16,500 (2025) from their own pay, and the employer matches up to 3% or makes a flat 2% contribution for all eligible employees. A SEP IRA requires the employer to contribute the same percentage of compensation for all eligible employees (whatever percentage the owner contributes for themselves). A 401(k) offers the most flexibility (employee deferrals, employer match, vesting schedules, profit sharing) but has the highest setup and administration cost ($500-$3,000/year).

✓Key takeaway

Retirement plan comparison for businesses with employees:

Feature	SIMPLE IRA	SEP IRA	401(k)
Employee deferral	$16,500 (2025)	No (employer only)	$23,500 (2025)
Employer contribution	3% match or 2% flat	Up to 25% of comp (same % for all)	Match + profit sharing
Max per participant	$16,500 + match	25% of comp (max $70,000)	$70,000 combined
Vesting	Immediate	Immediate	Cliff or graded (employer contributions)
Annual admin cost	Low ($0-$200)	Low ($0-$200)	High ($500-$3,000)
Setup deadline	October 1	Tax filing deadline (with extensions)	December 31
Employee eligibility	$5,000 comp in any 2 prior years	3 of last 5 years, $750 comp, age 21+	Varies (can set 1-year wait)
Best for	1-25 employees, simple admin	Owner wants max contribution, few employees	Flexible, larger businesses

SIMPLE IRA (Savings Incentive Match Plan for Employees):

Employee contributes from paycheck (salary deferral, like a 401(k))
Employer MUST match: either 3% of comp (dollar-for-dollar up to 3%) or flat 2% for all eligible
3% match is cheaper if few employees participate (you only match what they contribute)
2% nonelective is more expensive (you contribute 2% for ALL eligible, whether they participate or not)
Catch-up: $3,500 for age 50+ (plus SECURE 2.0 super catch-up $5,250 for ages 60-63)

SEP IRA (Simplified Employee Pension):

Employer-only contributions (employees cannot defer from their own pay)
The key restriction: whatever percentage you contribute for yourself, you MUST contribute for all eligible employees
Owner contributes 25% of their comp? Must contribute 25% of every eligible employee’s comp
This can make SEP expensive when you have highly paid employees
On 3 employees earning $50,000 each at 25%: $37,500 in employer cost

401(k) with employer match:

Employees defer from paycheck (up to $23,500 in 2025)
Employer match is discretionary and can vest over time (3-6 year vesting schedule)
Profit-sharing component allows additional employer contributions
Safe harbor 401(k): 3% nonelective or 4% match, avoids nondiscrimination testing
Administration: TPA (Third Party Administrator) required, annual compliance testing

Which plan is best for a small business with employees?

Hypothetical example

Round numbers. An HVAC company. Owner (sole shareholder of S-Corp). 3 employees. Single filer.

Compensation:

Person	W-2 Salary
Owner	$60,000
Tech 1	$50,000
Tech 2	$45,000
Apprentice	$35,000

Option 1: SIMPLE IRA (3% match)

Person	Deferral	3% Employer Match	Total
Owner	$16,500	$1,800	$18,300
Tech 1	$5,000 (contributes 10%)	$1,500	$6,500
Tech 2	$3,000 (contributes 7%)	$1,350	$4,350
Apprentice	$0 (doesn’t participate)	$0	$0

Employer cost: $1,800 + $1,500 + $1,350 = $4,650 Owner’s total retirement: $18,300 Owner’s tax deduction (employer match): $4,650 Owner’s personal tax savings ($16,500 deferral at 22%): $3,630 Total tax benefit: $3,630 + ($4,650 x 22%) = $3,630 + $1,023 = $4,653

Option 2: SEP IRA (25% of comp for owner)

Person	Employer Contribution (25%)
Owner	$15,000
Tech 1	$12,500
Tech 2	$11,250
Apprentice	$8,750

Employer cost: $15,000 + $12,500 + $11,250 + $8,750 = $47,500 Owner’s total retirement: $15,000 Total employer cost for employees: $32,500

The SEP costs $32,500 for employees (vs. $2,850 in the SIMPLE IRA). This is the SEP trap for businesses with employees: the equal-percentage rule makes it extremely expensive when the owner wants to maximize their own contribution.

What if the owner contributes only 5% under the SEP? Owner: $3,000 Tech 1: $2,500 Tech 2: $2,250 Apprentice: $1,750 Employee cost: $6,500 Owner retirement: $3,000

At 5%, the SEP is cheaper per employee dollar but the owner’s retirement ($3,000) is much less than the SIMPLE IRA ($18,300). The SIMPLE IRA wins for the owner.

Option 3: Safe Harbor 401(k) (3% nonelective)

Person	Deferral	3% Employer (nonelective)	Total
Owner	$23,500	$1,800	$25,300
Tech 1	$5,000	$1,500	$6,500
Tech 2	$3,000	$1,350	$4,350
Apprentice	$0	$1,050	$1,050

Employer cost: $1,800 + $1,500 + $1,350 + $1,050 = $5,700 Administration cost: $1,500/year (TPA) Total employer cost: $7,200 Owner’s total retirement: $25,300 ($7,000 more than SIMPLE)

Comparison:

Plan	Owner Retirement	Employer Cost (employees)	Admin	Total Cost
SIMPLE IRA	$18,300	$2,850	$200	$3,050
SEP IRA (25%)	$15,000	$32,500	$200	$32,700
SEP IRA (5%)	$3,000	$6,500	$200	$6,700
401(k) safe harbor	$25,300	$5,700	$1,500	$7,200

Winner for most small businesses with employees: SIMPLE IRA if the owner is satisfied with $18,300/year in retirement savings. 401(k) if the owner wants the maximum deferral ($23,500+) and can absorb the higher admin cost. SEP never wins when there are employees, because the equal-percentage rule makes it prohibitively expensive.

The “I want to max out but minimize employee cost” answer: 401(k) with safe harbor match (not nonelective):

Safe harbor match: 100% of first 3% + 50% of next 2% = effective 4% match
If employees contribute: employer matches at 4% of their salary
If employees DON’T contribute: employer owes nothing (match only)
Owner defers $23,500 (automatically passes safe harbor testing)
Low participation by employees = low employer match cost
This is the strategy when employees historically don’t participate actively

Age 60-63 super catch-up (SECURE 2.0): Starting 2025, participants aged 60-63 can contribute an extra $11,250 (instead of the regular $7,500 catch-up).

SIMPLE IRA: $16,500 + $5,250 super catch-up = $21,750
401(k): $23,500 + $11,250 super catch-up = $34,750

For an owner aged 60-63, the 401(k) advantage widens to $13,000 ($34,750 vs. $21,750).

Illustrative numbers only, not a real client and not advice for your facts.

How much can I contribute to each retirement plan type?

The Solo 401(k) generally allows the highest total contribution because it combines an employee deferral (the standard 401(k) limit, plus a catch-up amount for ages 50 and over) with an employer profit-sharing contribution of up to 20% of net self-employment income (the effective rate for a self-employed owner). A SEP IRA allows only the employer contribution (up to 20% of net SE income) with no employee deferral. A SIMPLE IRA has a lower employee deferral ceiling but simpler administration. At $100,000 net profit, a Solo 401(k) typically allows about $42,000 to $43,000 in total contributions (2025 and 2026 deferral limits, before any catch-up), while a SEP IRA caps around $18,600. Contribution limits adjust annually for inflation.

What changes if I hire employees beyond myself and my spouse?

Adding employees changes the plan math significantly. A SEP IRA requires the same contribution percentage for all eligible employees: contributing the effective 20% for yourself means contributing 25% of pay for every eligible employee. A SIMPLE IRA requires either a dollar-for-dollar match up to 3% of compensation or a flat 2% non-elective contribution for everyone. The Solo 401(k) is available only to owner-only businesses (the owner plus spouse); hiring even one common-law employee who meets eligibility thresholds converts it to a standard 401(k) with nondiscrimination testing and higher administration costs ($1,000-$3,000/year). Choose the right structure before your first hire.

What are the catch-up contribution rules for business owners over 50?

Business owners aged 50 and older can make additional catch-up contributions beyond the standard limits for most qualified retirement plans. For 401(k) plans including solo 401(k)s, the catch-up contribution is an additional $7,500 for 2025 on top of the standard $23,500 employee deferral limit. SEP IRAs don’t have catch-up provisions because contributions are employer-only and already allow up to 25% of compensation or $70,000. SIMPLE IRAs permit a $3,500 catch-up for those 50 and older, and starting in 2025, participants aged 60-63 get an enhanced catch-up of $5,000 under the SECURE 2.0 Act.

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Cite this page

Yarik Yarosh, CPA. "Retirement Plans for Small Businesses with Employees: SIMPLE IRA, SEP, and 401(k)." Blue Cloud CPA, September 5, 2026, updated September 23, 2026. https://bluecloudcpa.com/guides/small-business-retirement-plan-employees-simple-401k

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.