Say you run a small corporation with three employees, and all three are about to meet the requirements for coverage in your retirement plan.You have heard that plans integrated with Social Security are for big companies, and that the annual administration

costs will eat you alive. Neither is true.Before you weigh the options, you may find that your state has already made the choice for you.

In Many States, a Retirement Plan Is No Longer Optional

Fifteen states now run mandatory automatic-IRA programs: California, Colorado, Connecticut, Delaware, Illinois,Maine, Maryland, Minnesota, Nevada, New Jersey, New York, Oregon, Rhode Island, Vermont, and Virginia.Massachusetts and Washington use different models, and several more states are phasing in.In many states, if you do not sponsor a qualifying plan, you must enroll your workers in the state retirement program.

The employee thresholds differ:

• California and Oregon require even employers with just one W-2 employee to offer a retirement program.

• Connecticut, Delaware, Illinois, and Rhode Island start the requirement at five employees.

• New York starts at 10.

Penalties commonly run $100 to $250 per employee per year, and Connecticut goes to $1,500.

Two points to consider:

 First, the rules apply where your employees work, not where you are incorporated, so one remote hire can create an obligation in another state.

Second, if your business has a retirement plan, you are exempt, but several states treat silence as non-compliance. You have to register the exemption on the state portal. A perfectly good 401(k) that does not registeras exempt with the state produces penalty notices.

Yes, You Can Integrate with Social Security

The technique is called “permitted disparity.”Your plan contributes at a higher rate on compensation above an integration level than below it, on the theory that Social Security already delivers a benefit weighted to lower-paid workers.The integration level is commonly the Social Security wage base: $184,500 for 2026.Nothing about this requires you to be a big company. Permitted disprity is a checkbox on off-the-shelf prototype documents. It simply tilts the retirement benefits to the higher-paid participants—who, in a small company, are the owners.

The Menu, with 2026 Ceilings

There are four basic types of plans:

1. SEP-IRA. Employer money only, up to 25 percent of W-2 compensation, capped by the $72,000 annual additions limit, with compensation counted only up to $360,000. Almost no administration.The catch is that every eligible employee gets the same percentage you give yourself.

2. SIMPLE IRA. Employee deferrals of $17,000, or $18,100 under certain plans, plus $4,000 of catch-up at age 50 and $5,250 at ages 60 through 63. You, the employer, match 3 percent or contribute 2 percent across the board. Cheap and easy, but the ceiling is low and you cannot integrate or cross test.

3. Safe-harbor 401(k) with profit sharing. Employee deferrals of $24,500, catch-up of $8,000 at age 50 and $11,250 at ages 60 through 63, and total annual additions limited to $72,000.6 The safe-harbor design buys you out of the annual deferral testing that punishes plans where the owners save and the staff does not. Layer a cross-tested profit-sharing allocation and permitted disparity on top, and you can direct most of the employer contribution to the owners while still satisfying the rules.

4. Defined benefit or cash balance plan. The annual benefit limit is $290,000, which translates into contributions far above anything allowed by the plans described above. If the owners are meaningfully older than the staff, this is where you can find large deductions. It needs an enrolled actuary: budget roughly $2,000 to install and $2,000 to $4,000 a year to run, or more when paired with a cross-tested 401(k). Get two or three quotes, because the spread in annual actuary and management fees is wide.

Washington Helps Pay for a New Plan

Lawmakers want you to have a retirement plan. They created the following credits to help you:

• Startup credit. An employer with 50 or fewer employees can claim 100 percent of qualified plan startup and administration costs, limited in each of the first three years to the greater of (a) $500 or (b) the lesser of $250 for each eligible employee who is not highly compensated, or $5,000.9

• Employer contribution credit. Up to $1,000 per employee for employer contributions on behalf of employees earning $110,000 or less, at 100 percent in Year One and Year Two, then at 75 percent,50 percent, and 25 percent for the remaining three years.

• Auto-enrollment credit. The auto-enrollment credit is $500 per year for three years, starting with the first taxable year the employer includes an eligible automatic contribution arrangement in the plan. This credit isn’t limited to new plans.

Key point. The first two credits are for new plans. You cannot claim them if you maintained a plan covering

substantially the same employees during the three preceding tax years. Claim all three credits on Form 8881.12

The S Corporation Trap

Retirement plan contributions are computed on W-2 compensation as your plan document defines it, commonly Box 1 wages plus elective deferrals. S corporation distributions are not compensation and do not count.So the S corporation owner who pays himself a minimal salary to hold down payroll tax has also capped what he can put into the retirement plan.Model the salary and the contribution together, because the payroll tax you save on one side can cost you several times as much in lost benefits on the other.

Three Rules to Check in Your Plan Document

Here are three things to check:

1. 1. Roth catch-up. Since January 1, 2026, a participant age 50 or older whose prior-year FICA wages (W-2 Box 3) from your company exceeded $150,000 must make any catch-up contributions on a Roth basis. Your plan isn’t required to offer Roth contributions, but if it doesn’t, these participants can’t make catch-up contributions at all. The rule does not apply to SIMPLE IRAs.

1. 2. Long-term part-time employees. An employee with two consecutive years of at least 500 hours must be allowed to make elective deferrals, which may make your staff eligible sooner than your document’s ordinary service condition suggests.15 Note that you, the employer, do not need to make matching or other contributions for this group at this time.

1. 3. Automatic enrollment. New 401(k) plans established after December 29, 2022, generally mustauto-enroll, but employers with 10 or fewer employees are excepted. Adopting the feature voluntarily earns the $500 credit. Employees can opt out or change their rate at any time, and the plan can let them pull back automatic contributions within 90 days.

What to Ask Your Advisor For

Go into the retirement plan conversation with specific requests rather than a general question about what plan to

use. Ask for the following:

• An allocation illustration showing exactly what goes to the owners and what goes to each employee,under both a straight profit-sharing design and a cross-tested design with permitted disparity.

• A fee schedule broken into document, record keeping, and third-party administration or actuarial work, quoted in dollars rather than basis points, so you can compare it against the credits.

• A cash balance illustration if any owner is over age 45, showing the contribution range and the required employee cost. The cash balance plan adds a second plan—a defined benefit plan—that likely lets the owners put much more into their retirement plan.

Takeaways

• Check your state first. Fifteen states mandate coverage, two of them at the single-employee level.Having a company plan does not excuse you from registering the exemption with your state.

• Social Security integration is a standard prototype feature, not a big-company luxury. The 2026 integration level is $184,500.

• A safe-harbor 401(k) with cross-tested profit sharing, or a cash balance plan for older owners, does far more for you than a SEP or SIMPLE.

• Federal credits can cover the administration cost of a new plan outright, but only a genuinely new plan.

• In an S corporation, low W-2 wages cap your own contribution. Model salary and contribution benefits together to ensure you come out a winner.