Last updated: October 2026
You have a few employees, a business to run, and enough paperwork already. A retirement plan might sound like something you offer once the company gets bigger.
You don’t need a large staff to offer a retirement plan. Small businesses with two or three employees can consider a SIMPLE IRA, 401(k), or SEP IRA. The right choice depends on employer costs, employee eligibility, what you want to save yourself, and how contributions will work through payroll.
Can a Business With Two or Three Employees Offer a Retirement Plan?
Start with a few practical questions: How much can the business contribute each year? Do you want employees to save through their paychecks? How much would you like to put away as the owner?
Those answers are more useful than choosing a plan because another business has one.
| Plan | Who contributes? | What to consider |
|---|---|---|
| SIMPLE IRA | Employees through payroll, plus required employer contributions | Generally less administration than a conventional 401(k) |
| 401(k) | Employees through payroll; employer contributions depend on the plan | More design choices, with more administration and reporting |
| SEP IRA | Generally the employer | Contributions generally use the same percentage of compensation for eligible employees |
SIMPLE IRA vs. 401(k): Where Do You Start?
A SIMPLE IRA is designed for small employers and generally has less administrative work than a conventional 401(k). Employees can contribute through payroll, and the employer must contribute too.
The usual employer choices are a dollar-for-dollar match up to 3% of compensation or a 2% contribution for eligible employees, including those who don’t contribute themselves. Eligibility and contribution rules need to be reviewed before you choose. The IRS explains the basic SIMPLE IRA requirements here.
A 401(k) can work for a business of any size. It generally allows larger employee contributions and more plan-design choices, but comes with more administration, reporting, and potentially higher fees.
Ask a retirement plan provider to compare the costs and responsibilities for your actual employee list. “Starts at” pricing is helpful. Knowing what your business would pay is better.
How Does a SEP IRA Work for a Small Business?
A SEP IRA is generally funded by the employer rather than through employee paycheck deductions. It can offer flexibility because the business generally decides whether to contribute each year.
But it is important to include the employee cost in your thinking. Under a typical SEP arrangement, contributions generally must use the same percentage of compensation for each eligible employee. A generous contribution for the owner can mean a meaningful contribution for the team, too.
Your accountant and plan provider can help you compare that cost with a SIMPLE IRA or 401(k).
What Would the Employer Contribution Actually Cost?
Work through the dollars before ruling a plan out.
For example, under a standard SIMPLE IRA with a 3% match, an employee earning $50,000 who contributes at least 3% would receive a $1,500 employer match for the year.
That works out to $125 a month for budgeting purposes, before plan fees or tax benefits. Add the other eligible employees and the owner to see the full annual cost.
A retirement plan is a commitment. It is easier to assess when you can see the annual cost.
Are There Tax Credits for Starting a Retirement Plan?
Eligible small employers may qualify for federal tax credits that help offset qualified startup and administration costs.
For eligible employers with 50 or fewer employees, the startup credit can cover 100% of qualifying costs, subject to an annual limit. The often-advertised maximum is $5,000 a year for three years, but a very small business may qualify for less.
For example, with three eligible employees who are not highly compensated, the employee-count-based annual cap would generally be $750, also limited by qualifying costs. You do not automatically receive $5,000 just for opening a plan.
A separate credit may help with qualifying employer contributions. Have your accountant review employee eligibility, any retirement plan the business offered in the past three years, and the expected credit before building it into your budget.
When Should You Start Planning?
Before the first paycheck you want the plan to cover.
For an existing business starting its first SIMPLE IRA, the usual deadline to establish the plan for the current year is October 1. There is a limited exception for businesses formed after that date.
If you’re reading this in fall 2026, a January 2027 start is worth discussing now. Employee notices, enrollment, account setup, and payroll instructions take time. Other plan types have different deadlines, so confirm the dates for the plan you choose.
Adding a retirement plan to next year’s payroll? Include the setup in your year-end payroll checklist so employee elections and payroll instructions are ready before deductions begin.
What Does Your Payroll Provider Need?
Once the plan is established, payroll needs the effective date, employee contribution elections, employer contribution instructions, and the correct deduction setup.
Also confirm who will send contributions to the retirement accounts and when. Taking money out of a paycheck and depositing it into a retirement account are separate steps. Both need to happen correctly and on time.
Your retirement plan provider can help with plan documents and administration. Your accountant reviews the tax treatment, and your payroll provider sets up the payroll deductions and calculations. Before starting, confirm who handles each task and which responsibilities stay with you as the employer.
Need Help With Retirement Plan Payroll?
Payroll Northeast works with small businesses in Massachusetts, New Hampshire, Rhode Island, Connecticut, Florida, and beyond. Once you’ve chosen a retirement plan, we can help set up payroll deductions and employer contribution calculations and coordinate the payroll details with your plan provider.
See what payroll would cost for your business.
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