401(k) Plans for Small Business Owners and Solo Entrepreneurs

Owning a small business or running a solo operation is a dream for many, but it comes with unique challenges-especially when it comes to retirement planning. Unlike employees of large corporations, small business owners and solo entrepreneurs don’t have the luxury of a built-in 401(k) plan or HR department to handle the details. Yet, building a secure financial future is just as important for you and your team. 

Offering a 401(k) plan isn’t just about your own retirement; it’s a powerful tool to attract and retain great employees, reduce your tax burden, and demonstrate your business’s long-term commitment to growth and stability. In this guide, we’ll explore the different types of 401(k) plans for small business owners and solo entrepreneurs, how to set one up, the benefits you can unlock, and how to overcome common hurdles.

Types of 401(k) Plans for Small Businesses and Solo Entrepreneurs

Solo 401(k) (Individual 401(k))

If you’re self-employed with no full-time employees other than a spouse, the Solo 401(k) is a top choice. This plan lets you contribute as both the employer and employee, maximizing your retirement savings.

• Who Qualifies: Sole proprietors, independent contractors, freelancers, and business owners with no full-time employees (except a spouse).
• Contribution Limits: For 2025, you can contribute up to $23,000 as an employee (plus a $7,500 catch-up if you’re 50+), and up to 25% of your net self-employment income as the employer. The combined total can reach $69,000 ($76,500 if 50+).
• Tax Advantages: Contributions are tax-deductible, and investments grow tax-deferred until withdrawal.
• Roth Solo 401(k): Many providers now offer Roth options, allowing after-tax contributions for tax-free withdrawals in retirement.

Solo 401(k)s are flexible and powerful, and they can be set up with many online brokers or fintech platforms.

Traditional 401(k)

A traditional 401(k) offers flexibility and scalability if your business has employees.

• Suitable For: Businesses of any size, especially those planning to grow.
• Features: You can offer employer matching, set vesting schedules, and customize plan rules.
• Employer Match: Matching contributions can be a powerful recruitment and retention tool.
• Plan Flexibility: Design eligibility requirements, automatic enrollment, and Roth options.

Traditional 401(k)s require more administration and compliance, but they’re the gold standard for businesses seeking a robust retirement benefit.

Safe Harbor 401(k)

A Safe Harbor 401(k) is designed to help businesses pass IRS nondiscrimination testing, which ensures plans don’t disproportionately benefit owners or highly compensated employees.

• How It Works: Employers must make mandatory contributions (either a match or a fixed percentage for all employees), but in return, they get simplified administration and avoid annual testing headaches.
• Benefits: All employees are immediately vested in employer contributions, and the plan is easier to manage.
• Who Should Consider: Businesses with highly compensated employees or owners who want to maximize their own contributions without worrying about failed testing.

SIMPLE 401(k)

The SIMPLE (Savings Incentive Match Plan for Employees) 401(k) is tailored for businesses with 100 or fewer employees.

• Contribution Limits: For 2025, employees can contribute up to $16,000, with an additional $3,500 catch-up for those 50+.
• Employer Match: Employers must match up to 3% of compensation or make a 2% non-elective contribution for all eligible employees.
• Lower Administrative Burden: Fewer IRS filing requirements and simpler plan management.
• Best For: Small businesses seeking an easy-to-administer plan with lower contribution limits.

Setting Up a 401(k) Plan: Steps and Considerations

Choosing the Right Plan

Start by assessing your business’s size, growth trajectory, and employee needs. Are you a solo entrepreneur, or do you have a growing team? Do you want the highest possible contribution limits, or is simplicity more important? Your answers will help you choose between Solo 401(k), traditional, Safe Harbor, or SIMPLE plans.

Selecting a Provider

Next, compare providers. Traditional financial institutions, payroll companies, and fintech platforms all offer 401(k) solutions. Consider:

• Costs: Look for transparent fee structures. Some providers offer flat monthly fees, while others charge based on assets or participants.
• Features: Evaluate investment options, online tools, and customer support.
• Ease of Use: Choose a platform that makes setup, contributions, and administration straightforward for both you and your employees.

Plan Design and Customization

Work with your provider to customize your plan:

• Eligibility: Decide when employees become eligible to participate (immediately, after 3 months, after a year, etc.).
• Vesting Schedules: Set how quickly employees gain ownership of employer contributions.
• Matching Formulas: Choose how much, if any, you’ll match employee contributions.
• Roth Options: Decide whether to offer Roth contributions for after-tax savings.

Compliance and Administration

401(k) plans come with IRS rules and annual filing requirements (such as Form 5500). You’ll also have fiduciary responsibilities to act in your employees’ best interests. Many providers offer administrative support, but staying informed and compliant is essential.

Maximizing the Benefits of a 401(k) as an Owner

Tax Advantages

Contributions to a 401(k) are tax-deductible for your business, reducing your taxable income. Investments grow tax-deferred, and Roth options allow for tax-free withdrawals in retirement. These benefits can add up to significant long-term savings.

Higher Contribution Limits for Owners

As both employer and employee, you can contribute much more to a 401(k) than to a traditional or Roth IRA. This is especially valuable for high-earning solo entrepreneurs or small business owners who want to supercharge their retirement savings.

Attracting and Retaining Talent

A 401(k) is one of the most sought-after employee benefits. Offering a retirement plan can help you attract top talent, reduce turnover, and show your commitment to your team’s financial well-being. It’s a powerful differentiator in a competitive job market.

Common Challenges and How to Overcome Them

Cost and Administrative Complexity

401(k) plans have a reputation for being expensive and complicated, but modern providers have made significant strides in reducing costs and streamlining administration. To minimize headaches:

• Shop Around: Compare providers for the best rates and features.
• Leverage Technology: Use digital platforms for automatic contributions, compliance tracking, and reporting.
• Outsource Administration: Many providers offer turnkey solutions that handle filings, compliance, and employee communication.

Employee Participation and Education

Getting employees to enroll and save can be a challenge. Boost participation by:

• Automatic Enrollment: Enroll employees by default, letting them opt out if they choose.
• Education: Offer workshops, webinars, or access to financial advisors.
• Clear Communication: Use simple language to explain the plan’s benefits and how to enroll.

Managing Cash Flow for Contributions

Small business income can be unpredictable. To manage cash flow:

• Plan Ahead: Forecast contributions and set aside funds during high-revenue months.
• Flexible Contributions: Some plans allow variable employer contributions, so you can adjust based on business performance.
• Budget Tools: Use digital tools like Beem to track real-time contributions and cash flow.

How Beem Can Help Small Business Owners with 401(k)s

Beem is designed to simplify financial management for small business owners and solo entrepreneurs:

• Budget Planner: Track your business income, expenses, and 401(k) contributions in one place. Visualize how contributions impact your cash flow and tax situation.
• Compliance Reminders: Set alerts for IRS filing deadlines, contribution limits, and plan updates.
• Employee Tools: Provide educational resources and communication tools to help your team understand and maximize their 401(k) benefits.
• Scenario Modeling: Explore how different contribution levels, matches, or plan designs affect your business and personal finances.

With Beem, you can focus on growing your business while staying on top of your retirement plan.

Conclusion

A 401(k) plan is more than just a retirement account; it’s a statement that you’re planning for the future, for yourself and your team. Whether you’re a solo entrepreneur maximizing your savings or a small business owner building a competitive benefits package, the right 401(k) plan can help you attract talent, lower your tax bill, and build lasting financial security.

With modern providers and digital tools like Beem, you can take control of your retirement savings and build a more secure financial future. In addition, Beem’s Everdraft™ lets you withdraw up to $1,000 instantly and with no checks. Explore your options, compare providers, and start building the retirement you and your employees deserve. Download the app here.

FAQs for 401(k) Plans for Small Business Owners and Solo Entrepreneurs