What hiring does to your retirement plan

A SEP requires the same contribution percentage for every eligible employee as for you, and yours is usually the highest rate in the business. irs.gov

That single rule is why the plan that was simplest with one person is the one that gets expensive with two, and why the retirement decision and the hiring decision are not as separate as they look.

The uniformity rule

A SEP’s contribution rate must be uniform across every eligible participant, and the owner is a participant. irs.gov You cannot contribute 20% for yourself and 3% for an employee.

The cost of your own contribution, with one hire

A sole proprietor contributing the full employer percentage for themselves, who hires one eligible employee on $50,000:


Your contribution rate	20% of net earnings
Rate you must use for the employee	the same 20%
Cost for a $50,000 employee	$10,000

Contributing nothing for yourself costs nothing for them. Contributing the maximum for yourself costs $10,000 a year for each eligible employee at that salary.

The rate is a choice each year, so a SEP does not lock you in. But the trade is stark and it is the whole design: your contribution and theirs move together.

Who counts as eligible, and the three-year gap

An employee must be covered if they are 21 or older, have worked for you in at least 3 of the last 5 years, and earned at least the SEP minimum compensation. irs.gov

All three, not any of them. The three-of-five rule is the important one and it cuts in your favour at first: a new hire is not eligible in year one. A SEP gives you roughly two years of full contributions before the cost arrives, which is more runway than the other plans offer.

You can adopt less restrictive terms — covering people sooner — but never stricter ones.

What happens to each plan

A SEP keeps working and gets expensive on the schedule above. Nothing has to change administratively.

A SIMPLE requires an employer match, capped at 3% of compensation, or a 2% nonelective contribution for everyone eligible. irs.gov That is far cheaper per employee than a SEP at a high owner rate — which is the case where a SIMPLE, usually the wrong plan for one person, becomes the right one for a very small team.

A solo 401(k) stops being solo. The “one-participant” designation depends on having no employees other than a spouse. irs.gov Once an eligible employee joins, it is a regular 401(k): nondiscrimination testing, different reporting, and administration somebody has to be paid to do.

The spouse exception, which is the one piece of good news

A spouse employed in the business is not a disqualifying employee for a one-participant plan. irs.gov They are a second participant in it — which means a couple running a business together can each make an employee deferral, roughly doubling the household’s contribution room without the plan changing category.

That is a large amount of room for a structure many couples already have, and it is worth checking against how the business currently pays them.

The order these decisions go in

The instinct is to choose a retirement plan now and revisit it if you hire. That works, with one exception worth planning around: if hiring is likely within two or three years and you want maximum contributions in the meantime, the SEP’s three-of-five rule gives you the longest window before the cost lands.

If hiring is likely soon, the calculation inverts. A SIMPLE’s capped match is predictable and small; a SEP’s uniform rate is neither.

And if hiring is not on the horizon at all, none of this changes the ordinary answer, which is decided by contribution room and by whether a Roth conversion is ever in your future.

Where to stop and ask

The moment there is a second person on the payroll, plan administration stops being a solved problem and becomes a service you buy. The cost of getting nondiscrimination testing wrong is disqualification of the plan, which is retroactive and expensive, and it is not a place to find out whether you understood the rules.