Employer-Sponsored Retirement Plans For Businesses

November 2, 2026

Understanding the nuances of different retirement plan options is beneficial for business owners. Selecting the right plan is a strategic decision since it can impact employee satisfaction, retention and overall organizational performance.

Today, most employer-sponsored retirement plans are defined contribution (DC) plans rather than defined benefit (DB) plans. DC plans specify annual contribution amounts, while employees bear the investment risk and their retirement outcomes depend on contributions, investment performance, and time invested.

Below we summarize the most common types of business retirement plans:

SEP IRA (Simplified Employee Pension)

Best fit: Sole proprietors and other small business owners.
Structure: Employer-funded only with contributions up to 25% of compensation (or 20% of SE net earnings minus ½ of self-employment tax), capped at $72,000 (2026).
Pros: Easy setup, high limits, and generally low administrative fees.
Cons: Must contribute same percentage to all employees; no employee contributions allowed.
Roth availability: Now permitted under SECURE 2.0.

SIMPLE IRA (Savings Incentive Match Plan for Employees)

Best fit: Businesses with 100 or fewer employees seeking simplicity and ease of set-up.
Structure: Employee deferrals + mandatory employer match (at least 1% and up to 3%) or 2% nonelective contribution where the employee does not have to contribute.
Limits: $17,000 deferral + $4,000 catch-up for employees aged 50 and older. There is also a “super catch-up” provision for individuals aged 60-63, which is $5,250 (2026).
Pros: Minimal administration, easy set-up, low cost, and no discrimination testing.
Cons: Lower limits, rigid match rules, lack of flexibility or customizability.
Roth availability: Now permitted under SECURE 2.0.

Solo 401(k)

Best fit: A Solo 401(k) is designed for owner-only businesses (including the owner and their spouse). This plan is generally unavailable if the business employs any common law employees who meet the plan’s participation requirements.
Structure: For 2026, employee deferrals are capped at $24,500 (plus an $8,000 catch-up provision for individuals age 50 and older). Total contributions, which include employer funding, are limited to $80,000 for those ages 50 or over ($72,000 for ages 49 and under). Employer contributions for W-2 employees are limited to 25% of W-2 wages, while self-employed individuals use an equivalent rate of 20% of net earnings from self-employment. All calculations are subject to the $360,000 annual compensation cap.
Pros: High contribution potential, flexible contributions, and Roth and loan options.
Cons: Cannot have common-law employees, and owners must fill out Form 5500 EZ once the plan has greater than $250,000 in assets.
Roth availability: Now permitted under SECURE 2.0.

Traditional 401(k)

Best fit: Established businesses seeking flexibility and maximum tax shelter for many employees.
Structure: For 2026, employee deferrals are capped at $24,500. Employer contributions are included in the overall contribution limit, which is capped at $72,000 for those under 50. This limit increases with catch-up contributions of $8,000 for individuals 50+ (making the maximum contribution $80,000), or “super catch-up” contributions of $11,250 for individuals aged 60 to 63 (making the maximum contribution $83,250).
Safe Harbor Option: Offers automatic compliance to IRS non-discrimination rules via one of the following employer contribution methods:
- 3% nonelective (the employee does not have to contribute)
- Basic 3% match plus 50% of the next 2% of employee deferrals
- Enhanced employer match of at least 4%

These provisions are typically accompanied by an immediate vesting schedule where all contributions vest to the employee as soon as they are made.

Pros: Highest limits, full design flexibility, and owner-favored profit sharing possible.
Cons: High cost/admin complexity, plan is also subject to discrimination testing.
Roth availability: for employee contributions. Employees can also elect employer contributions as Roth in vested plans, with the full contributable amount credited to the employee as earned income and taxed in the year that the contributions are made.

Defined Benefit Plans

Purpose: Designed for high-income or older business owners seeking substantially larger deductible contributions than a defined contribution plan alone allows. Typically opened in addition to a defined contribution plan, Defined Benefit plans are designed to be funded with the goal of providing a promised, formula-based benefit at retirement.
Structure: Defined benefit plans are employer-funded only and require actuarial certification to determine annual contribution amounts.
Pros: Provides employees with predictable income in retirement after vesting, allows larger deductions for business and owners, and the employer takes on the investment risk rather than the employee. Certain plans are insured through the Pension Benefit Guaranty Corporation (PBGC), protecting vested benefits up to statutory limits.
Cons: Highly complex and relatively expensive to administer, with limited flexibility once the plan and benefit formula are established.

For Use with the General Public. Financial Planning and Advisory Services offered through Vicus Capital, Inc., a federally Registered Investment Advisor.

Categories: Financial Planning

Tags: Employer-Sponsored Retirement Plans, Retirement, Retirement Plans, Retirement Plans for Businesses