Don't get caught up in the different titles or worry about the complexity. This post is here to make sense of three of the most common small business retirement plans: the Solo 401(k), the SEP IRA, and the 401(k). According to the Bureau of Labor Statistics, only 59% of workers at businesses with fewer than 100 employees have access to a retirement plan at all, compared to 90% at businesses with 500 or more employees. The smaller the business, the less likely there's a plan in place. To find the right one, start with a single question: how big is the business?
| Solo 401(k) | SEP IRA | 401(k) | |
|---|---|---|---|
| Best for | An owner with no employees (a spouse on payroll is fine) | An owner with a small, stable team | A business that's actively growing its headcount |
| Who funds it | The owner, as both employee and employer | The employer only | The employer and, optionally, employees |
| Can employees defer their own pay? | No other employees allowed on this plan | No — employer contributions only | Yes |
| Contribution rule for staff | Not applicable | Same percentage for every eligible employee | Employer sets its own match or formula |
| Loan provisions | Yes | No | Often |
| Administrative load | Low | Low | Higher — testing and annual filing |
Just you? Look at the Solo 401(k)
A Solo 401(k) is built for exactly one situation: a business owner with no employees other than a spouse. If that's you (a contractor, an artisan, a single-member LLC, an S-Corp with just yourself on payroll), this plan is worth a close look.
The reason business owners like it is flexibility. You can contribute as both an employee and employer, which raises how much you're able to put away, and you can elect either Roth or Traditional. The combined employee-and-employer contribution ceiling is set by the IRS and adjusts most years, so it's worth confirming the current figure before deciding how much to contribute. A Solo 401(k) also allows for loan provisions, which give business owners another layer of flexibility to access those "untouchable" retirement assets before age 59 ½.
The catch is that the moment you hire your first non-spouse employee, you generally can't keep this plan. It's designed to stay a single-business-owner account.
A few employees? Think about a SEP IRA
The SEP IRA can shine, but it comes with some constraints depending on the situation. It's funded entirely by the employer (employees can't defer their own salary into it), and contributions are capped at 25% of compensation or a flat dollar ceiling set annually by the IRS, whichever is less. That gives employees a retirement account and employer-funded contributions, but not as much control as some may want.
The appeal here is simplicity. There's less administrative overhead compared to a 401(k), and the plan can be opened and funded quickly, even after year-end. The trade-off is that whatever percentage you contribute for yourself, you must contribute that same percentage for every eligible employee. This tends to work best for solo owners or small teams (law offices, farmers, real estate agents). Once you're regularly hiring, that "same percentage for everyone" rule starts to get expensive fast.
Growing your team? Consider a 401(k)
Once a business has a decent employee headcount, a traditional 401(k) comes into play. "401(k)" simply refers to the section of the IRS tax code that created this type of employer-sponsored retirement savings plan. A business hosts the plan, and employees have the option to contribute from their own income. The employer has full discretion over whether, and how much, to match or contribute on employees' behalf — a 3% match, for example.
A 401(k) opens the door to features and structure that mature businesses often need, such as loan provisions, a Roth option, and more flexible ways to contribute on behalf of ownership and employees. The trade-off for that flexibility is more administrative overhead: payroll complexity, nondiscrimination testing, plan administration, and an annual Form 5500 filing. It's a bigger commitment, but it's built to scale for a larger workforce in a way a SEP IRA is not.
So, which one is right for you?
A brief recap for those who skipped to the end: no employees, look at a Solo 401(k). A few employees and you want to keep things simple, a SEP IRA may fit. Trying to attract and retain talent as you grow, a 401(k) is likely the next step.
This is a simplified starting point, not the whole map. There are other structures that may fit a specific situation, and that's exactly the kind of nuance worth talking through one-on-one. Book a conversation through our website if you'd like to talk through what fits your business.
This material is for educational purposes only and does not constitute tax, legal, or investment advice. Tax laws are complex and subject to change. Please consult with a qualified tax professional or legal advisor regarding your specific situation before making financial decisions.