Offering a retirement plan used to feel like something only big companies did. That has changed. Employees increasingly expect it, and in a growing number of states, employers are now required to provide access to one. The encouraging news is that starting a plan is more affordable than it has ever been, thanks to recent tax credits that can cover much of the setup cost.

This guide covers the essentials: whether your business is required to offer a plan, the main options to choose from, how to pick the one that fits your goals, and the incentives that help offset the cost. The specifics vary by state and business structure, and contribution limits change every year, so it is always worth confirming the details with your accountant before you decide.

Are You Required to Offer a Retirement Plan?

The federal picture is simple: there is no federal law requiring most small businesses to offer a retirement plan. Washington encourages plans through tax breaks rather than mandates. One thing to know is that if you start a new 401(k), you will generally need to include automatic enrollment.

The state picture is where things are shifting. A growing number of states now require employers to either enroll their workers in a state-run savings program or offer a qualifying private plan. Most of these state programs are automatic-enrollment Roth IRAs that employees can opt out of, and in most cases, employers cannot contribute to them. The rules usually kick in once you reach a certain number of employees, have been in business for a set period, and do not already offer a plan. If your business is based in Minnesota, this is timely: the state's Secure Choice Retirement Program is rolling out for employers with five or more employees, with registration deadlines phased in over time.

Penalties for ignoring a mandate vary by state and tend to grow the longer you wait. The good news is that you can satisfy almost any state mandate by sponsoring your own qualified plan instead of using the state option. Many employers do exactly that. Because a private plan comes with higher contribution limits, the ability to match employee savings, and access to federal tax credits that the state programs do not offer.

**Why Offer a Plan, Even If You Are Not Required To?**

Even without a mandate, a retirement plan can be one of the smartest moves a small business makes. It helps you compete with larger employers for good people. Employer contributions are generally deductible, and credits can offset much of the startup cost. For many owners, a plan is also the single most effective way to lower taxable income while building personal wealth. And because automatic enrollment makes saving the default, far more of your team actually participates.

Your Main Plan Options

There is no one-size-fits-all plan. The best fit usually comes down to how many employees you have, how much you want to save, and how much administrative work you are willing to take on. Here are the options most small businesses consider, roughly in order from the smallest teams to the largest.

SEP IRA

Funded entirely by the employer, with no employee contributions. It is simple to set up, requires very little paperwork, and has no annual IRS filing. You decide each year whether to contribute and how much, which helps when income fluctuates. The catch is that if you have eligible employees, you have to contribute the same percentage of pay for them as you do for yourself. Contributions can reach 25 percent of compensation, up to an annual limit set by the IRS. Best for solo owners or very small teams that want flexibility.

SIMPLE IRA

Under this plan, employees contribute from their own paychecks, and employers must chip in too, either as a match or a flat percentage of pay. Limits are lower than a 401(k), but it is easier and cheaper to run. Employees can defer up to an annual limit set by the IRS, with additional catch-up contributions for those 50 and older. Best for businesses with up to 100 employees that want their team to save without the cost of a full 401(k).

Solo 401(k)

Built for owner-only businesses, meaning no full-time employees other than the owners and their spouses. A spouse who earns income from the business can participate too, and the plan can also cover a co-owner or business partner. Because you act as both the employee and the employer, you can save a lot: up to $24,500 as an employee in 2026, plus an employer contribution, for a combined cap of $72,000, or more with catch-up contributions if you are 50 or older. It also offers Roth contributions and the option to borrow from the plan. Best for self-employed owners and partners who want to save aggressively.

Traditional or Safe Harbor 401(k)

The most flexible option, with the highest limits, an employer match, and Roth contributions. A Safe Harbor design lets you skip most annual compliance testing in exchange for a required employer contribution. It costs more and requires more administrative effort, but it is also the strongest tool for recruiting and retaining employees. Best for growing teams that want a full-featured benefit.

State-sponsored auto-IRA

If you are under a state mandate and do not want to run your own plan, this is the default path. It is low-cost and low-effort, but the features and contribution limits are modest, and you generally cannot match or contribute. Best for very small businesses whose main goal is to meet the requirements.

If you are an older owner trying to catch up, it is also worth asking your accountant about defined benefit and cash balance plans, which allow much larger contributions. They are more complex to run, but they can dramatically increase your deductible savings.

How to Choose a Retirement Plan?

You can narrow it down quickly. Do you have employees, or is it just you and maybe a spouse? How much do you want to save each year? Do you want your team to contribute, and will you match? How steady is your cash flow?

As a rough guide: if it is just you, a Solo 401(k) maximizes savings while a SEP IRA keeps things simple. With a handful of employees, a SEP IRA or a SIMPLE IRA both work well. As your team grows, a 401(k) or Safe Harbor 401(k) gives you the most flexibility and the highest limits. And if you only need to satisfy a mandate, the state auto-IRA does the job, though a private plan gives you more upside.

The Tax Credits That Make It Affordable

Thanks to the SECURE 2.0 Act, starting a plan can cost very little out of pocket, especially for businesses with 50 or fewer employees. Three credits do most of the work: a startup cost credit that can cover up to 100 percent of your setup and administration costs for the first three years, up to $5,000 a year; an employer contribution credit worth up to $1,000 per employee over the first several years; and an auto-enrollment credit of $500 a year for three years, just for including automatic enrollment.

To claim them, confirm you are eligible, keep good records of your startup and contribution costs, and file the right form with your tax return. Your accountant can help you stack the credits and carry forward anything you cannot use right away.

Two Compliance Rules to Keep in Mind

If you set up a new 401(k), a couple of rules are worth understanding from the start. Most newly established 401(k) plans must automatically enroll eligible employees, who can always opt out if they prefer. And higher-earning employees age 50 and older must make their catch-up contributions on a Roth, or after-tax, basis, so it is worth confirming that your payroll and plan provider can handle that. Neither is a hurdle with a good provider, but knowing about them upfront helps you ask the right questions.

Getting Started

Setting up a plan is more manageable than it looks. Choose your plan type and provider, confirm the setup deadline for the tax year you want to claim, coordinate with payroll to ensure contributions are handled correctly, and let your team know about their new benefit. Then set a reminder for the annual deadlines so you do not miss a contribution window. A few common mistakes to sidestep: waiting too long and losing a year of contributions and credits, ignoring a state mandate until the penalties add up, forgetting the SEP IRA equal-contribution rule once you have employees, and picking a plan that fits today but will not grow with you.

How KeyLin Advisors Can Help

Choosing and setting up a retirement plan does not have to be overwhelming when you have the right support. KeyLin can help you understand your obligations, including any state mandate that applies to you, compare the options against your goals and cash flow, identify and claim the credits you qualify for, and coordinate setup with your payroll and bookkeeping so everything runs smoothly. From there, we help keep your plan compliant year after year.

We work with small businesses across the country, and our team brings deep expertise without the jargon. Ready to take retirement planning off your plate? Schedule a consultation or learn more about our services.

Retirement Planning for Small Business Owners: A Practical Guide for Employers