There are multiple retirement plan options available to business owners. The best plan for you depends on your business situation and needs.
Simplified Employee Pension Plan (SEP IRA)
A SEP allows you to set up an IRA (a "SEP IRA") for yourself and each of your eligible employees. You contribute a uniform percentage of pay for each employee, but you don't have to make contributions every year which offers you some flexibility when business conditions vary. SEPs have low start-up and operating costs and can be established easily. The plan must cover any employee aged 21 or older who has worked for you for three of the last five years and who earns $600 or more.
SIMPLE IRA Plan
The SIMPLE IRA plan is available if you have 100 or fewer employees. Employees can elect to make pretax contributions and you must either match your employees' contributions dollar for dollar up to 3% of each employee's compensation or make a fixed contribution of 2% of compensation for each eligible employee. (The 3% match can be reduced to 1% in any two of five years.) SIMPLE IRAs have low start-up and operating costs and can be established easily. Each employee who earned $5,000 or more in any two prior years and who is expected to earn at least $5,000 in the current year must be allowed to participate in the plan.
Profit Sharing Plan
Typically, only you, not your employees, contribute to a qualified profit sharing plan. Your contributions are discretionary; there is usually no set amount you need to contribute each year, and you have the flexibility to contribute nothing at all in a given year if you choose (although your contributions must be nondiscriminatory, and "substantial and recurring," for your plan to remain qualified). The plan must contain a formula for determining how your contributions are allocated among plan participants. A separate account is established for each participant which holds your contributions and any investment gains or losses. Generally, each employee with a year of service is eligible to participate.
With a 401(k) plan, employees can make pretax and/or Roth contributions each year, which go into a separate account for each employee and aren't taxed until distributed. Generally, each employee with a year of service must be allowed to contribute to the plan. You can also make employer contributions to your 401(k) plan; either matching contributions or discretionary profit sharing contributions. 401(k) plans are required to perform somewhat complicated testing each year to make sure benefits are not disproportionately weighted toward higher paid employees but you don't have to perform discrimination testing if you adopt a "safe harbor" 401(k) plan.