Retirement Plan Selection for Business Owners

Qualified retirement plans under § 401(a) and IRA-based plans under § 408 offer business owners materially higher contribution capacity and deferral capacity than rank-and-file W-2 employees access. Plan selection is a function of (a) business structure and headcount, (b) cash flow capacity, (c) owner age and target retirement, (d) participant census and demographics, (e) integration with downstream defined-benefit overlays.

SEP-IRA — § 408(k)

Employer-only contributions. 2025 limit: lesser of 25% of compensation or $70,000 (subject to § 415(c) limit). For sole proprietors, the 25%-of-comp limit is computed on net SE income reduced by 1/2 SE tax and the SEP contribution itself, yielding an effective rate of ~18.6% of pre-contribution net SE income; for S corp shareholder-employees, the 25%-of-W-2 limit applies cleanly.

Uniform allocation requirement under § 408(k)(3)(C): same percentage of compensation for all eligible employees. Eligibility default: age 21, worked 3 of last 5 years, $750+ comp (2025). Can be set more generously.

Use case: owner-only or near-owner-only businesses with no near-term hiring plan. Switching to a 401(k) later is straightforward.

SIMPLE-IRA — § 408(p)

For employers with 100 or fewer employees. 2025 employee deferral limit: $16,500; age-50 catch-up $3,500; age 60-63 enhanced catch-up under SECURE 2.0. Employer match: 3% of comp (dollar-for-dollar; may reduce to 1% in 2 of any 5 years) or 2% non-elective.

Comparatively modest contributions; simple admin; restrictions on rollovers (2-year exclusive lockup post-SIMPLE-IRA contribution before tax-free rollover to non-SIMPLE under § 408(d)(3)(G)).

Solo 401(k) — § 401(k) for owner-only businesses

Two-component contribution: employee deferral up to $23,500 (2025; plus $7,500 age-50 catch-up; enhanced $11,250 catch-up age 60-63 per SECURE 2.0); employer profit-sharing contribution up to 25% of comp (or 20% effective for sole props). Combined cap: § 415(c) ($70,000 in 2025; $77,500 with catch-up; higher with SECURE 2.0 enhanced catch-up).

Available only if no eligible employees other than owner (and spouse). Adding an employee triggers conversion to a traditional 401(k) with full compliance overhead.

Roth designated account permitted under SECURE 2.0; mandatory Roth catch-up for high earners (>$145K prior-year wages) effective 2026 under § 414(v)(7).

Traditional 401(k) with safe harbor

Triggered by W-2 employees and the need to pass ADP/ACP testing or avoid top-heavy minimums. Safe harbor designs under § 401(k)(12) or § 401(k)(13): 3% non-elective contribution (deemed pass) or matching contribution (100% on first 3%, 50% on next 2%, or qualified automatic enrollment match).

Profit sharing overlay under § 401(a)(4) with new comparability / cross-tested allocation may significantly favor owners over rank-and-file given older owner average age and age-weighted allocation formulas. Requires actuarial certification for the safe harbor.

Cash balance overlay — § 414(j) defined benefit

Permits owner contributions far above the § 415(c) DC limit. § 415(b) limits a DB plan’s benefit to the lesser of $280,000 (2025) per year or 100% of average comp; cash balance plans target this maximum benefit at age 62-65 and compute annual contributions actuarially. For a 55-year-old owner targeting a $280K annual benefit at age 62, the annual cash balance contribution can be $200K+ on top of 401(k) deferral.

Cash balance plans are tested for nondiscrimination on aggregate basis with the 401(k)/profit sharing. Employee contribution costs (gateway minimum ~5-7.5% of comp for staff in the combined plan) reduce the owner-favorability; for plans where staff comp is low relative to owner comp, the overlay remains powerfully owner-favorable.

Controlled-group complications

Under § 414(b)/§ 414(c), businesses meeting common-ownership thresholds are aggregated for retirement plan coverage testing (§ 410(b)), § 415 contribution limits, and top-heavy testing. Multi-entity owners (operating S corp + management LLC) must run coverage on the aggregate group.

Affiliated service group rules under § 414(m) can sweep otherwise non-controlled entities into the same employer for plan purposes; particular concern for professional service businesses (medical, legal, accounting).

SECURE 2.0 highlights

• Required automatic enrollment for new 401(k)s starting in 2025.
• Enhanced age 60-63 catch-up.
• Mandatory Roth catch-up for high earners effective 2026 (delayed from 2024).
• Starter 401(k) plans for employers with no plan.
• Roth employer match permitted (taxable to employee in year of contribution).
• Saver’s match (refundable credit) replaces Saver’s Credit.
• Long-term part-time eligibility expanded.

Practitioner posture

1. Annual census. Plan selection should be re-modeled annually as headcount or owner age shifts.
2. Document selection rationale. Client file should include census, projected contribution, alternatives considered, why selected; protects against later "you should have recommended X" complaints.
3. Plan adoption deadlines. SECURE 1.0 extended adoption windows for several plan types to return due dates; SECURE 2.0 expanded further. Track current.
4. Restatement cycles. Pre-approved plans run on 6-year restatement cycles; keep documents current.
5. Form 5500 obligations. Solo 401(k) requires 5500-EZ at $250K asset threshold; SIMPLE and SEP do not file 5500.