Setting Up a Retirement Plan for Employees

Surprising fact: the 401(k) elective deferral limit rises to $23,500 in 2025, while IRAs stay at $7,000 — a change that affects take-home pay and employer communications.

This short guide helps small business leaders in the United States get started with clear options, practical steps, and honest costs. It covers core choices, compliance must-haves, and which duties owners handle versus outside providers.

Expect quick comparisons: Payroll Deduction IRAs for simplicity, SEP IRAs for employer-funded flexibility, SIMPLE IRAs for very small teams, profit-sharing for discretionary rewards, and 401(k)s for scalable features and auto-enrollment credits.

The guide pulls trusted resources — IRS rules, DOL tools, and the U.S. Chamber’s how-to steps — so you can act this quarter with confidence and avoid common compliance traps. You’ll also learn which costs may qualify for tax credits and how to brief staff on new limits.

Key Takeaways

2025 limits change how contributions and budgets align.
Simple, scalable options exist for any small business.
Use IRS and DOL resources to meet reporting duties.
Owner tasks versus provider tasks are clarified.
Compare providers to control fees and boost engagement.
Get started now to capture credits and streamline payroll — see a top 401(k) resource here.

Why offering a retirement plan benefits small businesses and employees today

Offering a structured savings vehicle signals stability and helps small businesses compete for top talent. It also builds trust and shows a long-term commitment to staff.

Attracting and retaining talent with retirement savings benefits

Hiring edge: A clear savings benefit helps small firms win high-caliber candidates in tight markets. Workers often choose jobs with stronger total rewards.

Retention gains: Regular employer contributions and easy payroll deferrals reduce turnover costs and improve morale. Higher participation leads to measurable culture and productivity benefits.

Tax advantages for employers and employees in the United States

Contributions may lower current taxable income. Employee pretax deferrals defer taxes until distribution, while many employer contributions are deductible and help business cash flow.

“Small employers can claim tax credits for the cost of establishing certain plans.” — U.S. Department of Labor

Benefit	Business impact	Tax note
Signals stability	Improves recruiting and retention	Helps qualify for startup tax credits
Matching or contributions	Boosts participation and loyalty	Often tax-deductible to the employer
Employee pretax deferrals	Increases take-home benefits	Taxes deferred until withdrawal

Use DOL guides and tools to get clear, worker-facing information. For related account choices, see recommended IRA accounts for beginners.

Plan options small businesses can consider before they get started

Choosing the right option means weighing cost, administrative work, and who makes contributions. Below are common choices and key trade-offs to help match a product to your team and growth goals.

Payroll Deduction IRA

Least overhead: Employees open their own IRAs at a financial institution. Employers simply forward payroll deduction amounts and no employer forms are required.

SEP IRA

Employer-funded flexibility: Contributions are discretionary and use Form 5305-SEP or a prototype document. Employers must apply uniform eligibility and can make contributions up to their tax-filing deadline.

SIMPLE IRA

Designed for businesses with under 100 staff. Employees defer pay; the employer gives a match or nonelective contribution. Use Form 5304-SIMPLE or 5305-SIMPLE and provide timely notices.

Profit-sharing plans

Employers set yearly contributions and allocations. These plans offer discretionary rewards but require attention to eligibility, vesting, testing, and annual Form 5500 filings.

401(k) plans

Offer deferrals, matches, and designs like safe harbor or automatic enrollment to ease testing. Use a trust for assets and note 2025 deferral limits when communicating contribution options.

Compare options in more detail to choose the best match for your business.

retirement plan for employees setup: a practical step-by-step approach

Begin with a clear checklist that ties your goals to costs, eligibility, and payroll deadlines. Use simple metrics: target participation, employer contribution level, and an admin budget.

Define goals, budget, and eligibility

Document who qualifies, vesting rules, and contribution limits. Keep this short and shareable so business owners and employers can review quickly.

Select a plan type and trustee or institution

Choose the appropriate plan options and pick a trustee or financial institution that handles recordkeeping and payroll deduction. Ask for vendor assistance early to speed onboarding.

Complete required forms and agreements

File the right form: Form 5305-SEP for a SEP or Form 5304-SIMPLE / 5305-SIMPLE for a SIMPLE. For a 401(k), execute provider agreements and set up a trust.

Notify employees and implement contributions

Send clear notices, open participant accounts, coordinate payroll deduction testing, then begin contributions. Track investments and document monitoring reviews.

Create a compliance calendar (contribution dates, notices, Form 5500 deadlines).
Use provider advice and DOL resources for fiduciary information and fee comparisons.
Periodically revisit design to support retention and cost goals; get started with IRA options.

Compliance, fiduciary duties, and ongoing reporting requirements

Managing fiduciary duties requires clear processes and regular checks to protect staff and the business. Employers must act prudently, diversify investments, and follow written documents when making decisions.

Understanding ERISA duties and selecting service providers

Start with roles: identify who acts as fiduciary, what authority they have, and how decisions are recorded. Documented minutes and selection criteria are essential.

When choosing vendors, evaluate services, fee structures, and training. Regular benchmarking keeps vendor arrangements defensible and cost-effective.

Disclosures, fee comparisons, and DOL tools

Deliver clear fee and investment information to participants. Provide summary descriptions and timely notices so workers have the data they need.

Use the DOL’s 401(k) Plan Fee Disclosure Tool to compare administrative and investment costs side-by-side. This supports a prudent process when reviewing fees and funds.

Annual filings and records: Form 5500 and EFAST

Most qualified plans must file a Form 5500 each year through the EFAST system. Accurate filings list assets, service providers, and basic operational details.

Keep supporting records and show who files what and when. Good recordkeeping and occasional professional advice reduce audit risk and ensure regulatory compliance.

Key steps: document fiduciary processes, monitor vendors, disclose fees, and file Form 5500 timely.
Seek outside assistance and expert advice when needed to maintain controls and timely deposit of employee deferrals.

Costs, tax credits, and choosing providers to help your business

Start by comparing true costs and credits so your small business can select services that match growth and budget.

Break down total cost of ownership: include recordkeeping, advisory, custodial, payroll integration, and participant education fees. Request fee worksheets from vendors to compare apples-to-apples.

Leveraging startup and automatic enrollment credits

The SECURE Act offers a startup tax credit up to $5,000 plus an extra $500 when you add automatic enrollment. Use the IRS guide to learn claim steps and eligibility: startup credit details.

Evaluating services, recordkeeping, and advisory support

Assess vendor capabilities: recordkeeping accuracy, cyber security, service-level agreements, and investment menus. Many providers (e.g., Morningstar or Ascensus) supply advisory and education that reduce internal work.

Compare bundled vs. unbundled services and the tradeoffs in cost and control.
Document investment selection rationale with an advisor and keep clear fiduciary records.
Use structured fee and performance reports to choose a provider that helps your business scale.

For additional savings-account options and broader context, see exploring new savings accounts.

Conclusion

Wrap up your decision process with a compact checklist that keeps costs, compliance, and participation front and center.

Quick recap: choose the option that matches company size and budget — Payroll Deduction IRA for simplicity, SEP IRA for employer-funded contributions, SIMPLE IRA for shared deferral, profit-sharing for discretionary awards, and 401(k) when auto-enrollment or advanced features matter.

Confirm 2025 limits, set contribution rules, pick a financial institution, complete IRS forms, link payroll, and document governance. Leverage tax credits and vendor proposals, then run clear employee education to boost savings and participation.

Next step: consult an advisor, compare offers, and finalize a short checklist. Also see guidance on retirement payout choices as you refine communications.

FAQ

What are the first steps to setting up a retirement plan for a small business?

Start by defining goals, budget, and eligibility for your workforce. Decide whether you want employer contributions, payroll deduction, or a simpler IRA-style solution. Then select a financial institution or trustee, complete required IRS documents and plan agreements, and coordinate with payroll to begin employee contributions.

How does offering a savings benefit help attract and retain staff?

A competitive savings option signals that your business values long-term employee well-being. It improves recruitment and retention by giving workers a clear path to build assets, increases overall job satisfaction, and can differentiate your business from competitors during hiring.

What tax advantages do small businesses and workers get in the United States?

Employers may deduct contributions and qualify for tax credits such as the SECURE Act startup credit and automatic enrollment credit. Employees benefit from tax-deferred growth in traditional accounts or tax-free withdrawals in Roth accounts, depending on the chosen vehicle and elections.

How do Payroll Deduction IRAs compare to SEP IRA and SIMPLE IRA options?

Payroll Deduction IRAs have the lowest administrative burden and require no employer contribution. SEP IRAs are employer-funded and offer flexibility for very small businesses with variable profits. SIMPLE IRAs work well for firms under 100 employees and include shared employee deferrals plus mandatory employer match or nonelective contribution.

When should a company choose a 401(k) or profit-sharing approach?

Choose a 401(k) if you need higher 2025 contribution limits, want safe-harbor or automatic enrollment features, or expect employees to value elective deferrals. Profit-sharing suits employers who prefer discretionary contributions tied to profitability and want control over annual funding amounts and vesting rules.

What documents and filings are required after selecting a plan?

You must execute the plan document with your financial institution or provider, adopt trust and recordkeeping arrangements, and meet IRS notice requirements. Many plans also require Form 5500 annual filings via the EFAST system and disclosure materials to participants.

What are employer fiduciary duties under ERISA and how do I choose providers?

Employers acting as plan sponsors must act prudently, avoid conflicts of interest, and monitor service providers and investments. Use transparent fee comparisons, check provider credentials, and keep written records of decisions. The Department of Labor provides tools like the 401(k) Plan Fee Disclosure Tool to help evaluate vendors.

How can small businesses manage costs and get tax credits when launching a program?

Shop for bundled recordkeeping and investment services to reduce fees, consider low-cost index funds for participants, and apply for available tax credits such as the SECURE Act startup credit and the automatic enrollment credit. Work with a CPA or retirement advisor to confirm eligibility and claim credits on tax filings.

What steps are needed to notify employees and implement payroll deductions?

Provide required plan notices and enrollment materials, explain eligibility and vesting rules, and offer clear instructions for deferral elections. Coordinate with payroll to set up automatic withholding and deposit schedules, and confirm accounts are established at the chosen financial institution.

How should employers monitor investments and document ongoing administration?

Establish a regular review schedule for fund performance, fees, and service quality. Document meeting minutes, selection criteria, and any changes. Ensure participant education materials are available and keep records for compliance and potential audits.