Today, there are a number of small business retirement plans that offer relatively small amounts of paperwork and overhead. Historically, a small business owner would have difficulty providing a retirement plan because of the high cost per employee. Changes in the IRS's options for small businesses have made small business IRAs and 401ks more efficient. Now, the choice is between the various low documentation, small business options available.
The SIMPLE 401k plan is just like a traditional 401k, with a few exceptions. With this option, the company sets up a retirement plan as an organization and appoints a plan manager. Employees can then opt into the plan, directly depositing portions of their paychecks into the retirement account and receiving tax deductions for these contributions. The primary differences between this account and a traditional 401k arise in the paperwork. These structures are low documentation, requiring only one form in order to set them up. In order to qualify for this structure, an employer must have 100 or fewer employees. For a growing business, there is a two-year window to change the plan over to a different account, if you exceed this cap.
A second option within reach for a small business is the SIMPLE IRA structure. With this option, a small business owner again only needs to fill out one or two forms to set up the retirement plan for employees. You will then notify your employees the option has been set up, and you can begin withholding portions of their paychecks in order to arrange direct retirement account deposits. The difference with this option is who manages the IRA accounts. In this case, each employee sets up and manages their own account. You are only responsible for arranging the deposits and, where applicable, matching deposits you have agreed to match. Again, this low documentation option is only available if you have fewer than 101 employees.
Which is Best?
The question of which option is best comes down to whether you want to manage a 401k plan through your business. When you do, your business can direct investments and grow its capital while your employees are saving for retirement. You may be able to offer equity or stock plans in the future, and it is generally easier to transition if your business grows beyond 100 employees. However, managing a 401k plan adds cost to you, and it can also expose you to liability if your employee's experience a large drop in savings.
The IRA option is simpler to manage than the 401k option. Here, you do not have the burden of setting up, managing or otherwise directing a retirement plan. Your employees do all of this themselves. However, in the initial set up, this means you will have to gather and track information on up to 100 different retirement accounts. This can be a more burdensome process in the beginning of the retirement plan, despite being easier to administer down the line.