A Retirement Plan Is a Business Commitment
Start With Who the Plan Must Serve
A retirement plan can help an owner save, manage taxable income, and offer a meaningful employee benefit. But the largest advertised contribution is a poor starting point for choosing one.
An owner working alone has different options from a practice with longtime employees. A business with predictable profits can support a different commitment from one rebuilding its cash reserves.
Compare the owner contribution, the employee obligation, and the work required to keep the plan running. The deduction is one result of that decision—not the entire decision.
Start With the Business, Not the Contribution Limit
Before comparing providers, assemble a short fact sheet: entity type, ownership interests in other businesses, employee ages and compensation, hire dates and hours, current plans, and the amount the business can contribute without straining operations.
Add the owner’s retirement target and personal cash needs. If the owner also participates in another employer’s plan, include those deferrals in the discussion. An additional business does not automatically create a second personal salary-deferral allowance. 1
Use the Right Compensation Number
For an S corporation shareholder, distributions are not retirement-plan compensation; contributions depend on qualifying compensation such as W-2 wages. 2 For a self-employed owner, the calculation uses adjusted net earnings rather than gross receipts, including adjustments for the deductible part of self-employment tax and the owner’s contribution. 3
Ask the tax preparer and plan administrator to agree on the compensation input before anyone quotes a maximum. A projection built on the wrong number can look precise while answering the wrong question.
Compare the Main Plan Types
The following is a starting comparison, not an eligibility determination. Plan documents and the actual employee census control what a particular business can implement. 4
| Plan | Why Consider It? | What Needs Attention? |
|---|---|---|
| SEP IRA | Employer-funded savings with flexibility over annual contributions. | Eligible employees generally receive the same contribution percentage as the owner. |
| SIMPLE IRA | Employee salary deferrals with a relatively straightforward structure. | Employer contributions are required; eligibility and limits differ from a 401(k). |
| Owner-Only 401(k) | Combines owner salary deferrals and employer contributions. | Designed for an owner with no employees other than a spouse; hiring changes the analysis. |
| 401(k) With Employer Contributions | Employee savings plus flexibility in plan design, including profit sharing. | Employee costs, testing, payroll integration, and administration matter. |
| Defined Benefit / Cash Balance | Potentially larger contributions for an appropriate business and participant group. | Actuarial calculations, funding obligations, and ongoing costs require a longer view. |
SEP: Simple Does Not Mean Owner-Only
Most SEPs allocate employer contributions at the same percentage of compensation for all eligible participants. Contributions need not be made every year, but an owner cannot generally fund only their own account when other employees qualify. 5
SIMPLE IRA: Include the Employer Cost From the Start
A SIMPLE IRA generally serves employers with 100 or fewer employees meeting the applicable compensation test and generally requires that the employer maintain no other retirement plan, subject to exceptions. It combines employee deferrals with required employer funding. 4
The employer contribution usually takes the form of a match or a nonelective contribution. Confirm the applicable formula and limits rather than assuming every SIMPLE arrangement has identical rules. 6
401(k): More Design Choices, More Decisions
A traditional 401(k) can involve nondiscrimination testing that affects owner contributions. A qualifying safe harbor design can avoid certain tests in exchange for required contributions and other conditions. It does not eliminate every compliance responsibility. 7
Profit sharing can add a discretionary employer contribution, subject to plan terms and applicable rules. 4 Ask for a comparison using your actual census before assuming a particular allocation favors the owner at an acceptable employee cost.
Understand What the 2026 Limits Do—and Do Not—Promise
For 2026, the basic 401(k) employee elective-deferral limit is $24,500. The defined contribution annual-additions dollar limit is $72,000, excluding permitted catch-up contributions. Compensation-based limits and other restrictions also apply. 8
These are different limits. The $72,000 figure is not an extra employer contribution on top of $24,500. It generally caps the combined annual additions subject to that rule.
Catch-up eligibility, age-specific amounts, and applicable Roth requirements need separate review. Do not add a catch-up amount to an illustration unless the participant and plan qualify.
A plan’s legal ceiling is also different from the amount your business should fund. Working capital, payroll, debt service, and personal liquidity still need to work after the contribution leaves the operating account.
Compare an Owner-Only Example
Assume an incorporated business has one owner under age 50, no other employees, and $120,000 of eligible annual W-2 compensation before elective deferrals. Assume no deferrals to another plan, no related-business complications, sufficient cash, timely elections, and plan terms permitting a 25% employer contribution.
The owner-only 401(k) permits contributions in both the employee and employer capacities. 1 Under these assumptions, the employer contribution is $120,000 × 25%, or $30,000, under either option.
| Contribution | SEP IRA | Owner-Only 401(k) |
|---|---|---|
| Employer Contribution | $30,000 | $30,000 |
| Employee Salary Deferral | Not available under a new SEP | $24,500 |
| Total Plan Contribution | $30,000 | $54,500 |
The additional $24,500 comes from the owner’s salary. It is not another employer expense on top of that salary, and it reduces the compensation available for current spending. The comparison excludes ordinary IRA contributions, catch-ups, fees, and investment results.
This does not establish that a 401(k) is always preferable. If the owner has already used the personal deferral limit elsewhere, the illustrated advantage may disappear. A sole proprietor also cannot substitute gross business income for the W-2 compensation used here.
Have the preparer calculate the actual tax effects, including the choice between permitted pre-tax and Roth contributions. A dollar contributed is not a dollar of tax saved.
Price the Employee Commitment Before Signing
Consider a separate, simplified SEP example: an eligible owner has $120,000 of compensation and an eligible employee has $60,000. At a 20% contribution rate, the employer funds $24,000 for the owner and $12,000 for the employee—a $36,000 total cash requirement before fees. This illustrates a uniform percentage allocation, not a recommendation.
Employee contributions buy a real benefit for the team. The mistake is leaving them out of the budget while promoting only the owner’s deduction.
For each proposed design, request a dollar schedule showing owner allocations, employee allocations, required versus discretionary amounts, and estimated administration and investment costs. Compare a normal year with a weaker year and a year in which you hire additional staff.
An owner-only 401(k) needs reassessment when nonowner employees become eligible. 1 Do not assume part-time status or a contractor label settles eligibility. Give the administrator complete employment and ownership information, including other businesses, so coverage can be evaluated under the applicable rules.
Match the Funding Commitment to Cash Flow
A business with uneven earnings may value flexibility more than a larger projected contribution. A business with sustained profits and an owner who needs to accelerate retirement saving may justify reviewing a defined benefit arrangement.
A cash balance plan is a form of defined benefit plan. Contributions are actuarially determined; the business cannot simply choose a promotional deduction amount. An actuary evaluates funding, including required contributions. 9
Before considering that commitment, ask what happens if revenue falls, payroll changes, or investment results differ from assumptions. Model the combined cost if a 401(k) is also maintained, including employee funding and professional fees. A strong single year is a reason to investigate—not proof that recurring funding will be comfortable.
Keep operating reserves separate from the retirement contribution decision. Funding a plan should move the owner toward retirement security without making the business dependent on next quarter’s best-case revenue.
Assign the Work and Confirm the Deadlines
Plan adoption, employee elections, payroll deposits, employer funding, notices, and annual reporting are separate tasks. Their deadlines vary by plan and circumstances. A tax-return extension does not automatically extend every retirement-plan obligation. 3
A SEP can generally be established by the business return due date, including extensions. 5 Do not apply that rule to every other plan or assume salary deferrals can be arranged retroactively.
Use a written responsibility list before implementation:
- The owner provides the facts. Supply the census, ownership information, compensation, existing plans, and cash budget.
- The plan professional confirms the design. Document eligibility, contribution assumptions, testing, and applicable deadlines.
- Payroll confirms execution. Establish elections, contribution coding, deposit procedures, and reconciliation.
- The tax preparer models the return. Confirm compensation, deduction treatment, and the effect on projected tax payments.
- The business assigns ongoing oversight. Identify who monitors providers, fees, filings, and changes in employees or ownership.
For ERISA-covered plans, hiring service providers does not eliminate the employer’s responsibility to prudently select and monitor them. Employee payroll deductions must be deposited on the applicable timetable; annual reporting and disclosures also require attention. 7
Ask each provider which duties they accept in writing. A custodian, recordkeeper, adviser, administrator, and actuary may perform different roles. A proposal that leaves those roles vague is not a complete implementation plan.
Common Questions
Can I Use a Solo 401(k) if I Have Employees?
An owner-only plan is intended for a business with no employees other than the owner and spouse. Eligible nonowner employees change the plan’s obligations. Have the administrator review the census. See source 1.
Does a Second Business Give Me Another Deferral Limit?
Not automatically. The personal elective-deferral limit generally follows the individual across 401(k) plans. Employer contribution and related-business rules require a separate review. See source 1.
Do S Corporation Distributions Count as Compensation?
No. Shareholder distributions are not earned income for retirement-plan purposes. Use qualifying compensation, not the amount withdrawn from the company. See source 2.
Must I Fund a SEP Every Year?
Generally no. In a year you contribute, eligible employees must receive the contributions required by the plan. See source 5.
Does Safe Harbor Mean There Is No Administration?
No. A qualifying design can avoid certain nondiscrimination tests, but it still has contribution conditions and other administrative obligations. See source 7.
Is the Plan With the Largest Contribution Always Best?
No. Compare employee costs, fees, liquidity, administrative work, and ongoing funding requirements alongside the owner’s retirement goals.
Sources and Tax Guidance
- IRS: One-Participant 401(k) Plans, owner eligibility, contribution capacities, and multiple-plan deferrals.
- IRS: S Corporation Retirement Plan Contributions, compensation versus shareholder distributions.
- IRS Publication 560, self-employed calculations, plan requirements, and deadlines. Use current annual limits alongside the publication.
- IRS: Choosing a Retirement Plan—Plan Options, plan types and basic eligibility.
- IRS: SEP FAQs, allocation rules, annual funding, and establishment deadlines. Historical dollar amounts on that page are superseded by the current limits below.
- IRS: SIMPLE IRA Contribution Limits, employee limits and employer funding rules.
- Department of Labor: 401(k) Plans for Small Businesses, safe harbor designs, responsibilities, deposits, and reporting.
- IRS: Cost-of-Living Adjustments for Retirement Plans, 2026 contribution limits.
- IRS: Defined Benefit Plan, actuarial funding and plan characteristics.
Educational information, not individualized tax, legal, investment, or plan-administration advice. Examples are hypothetical and exclude fees and investment results. Eligibility, deductions, funding, and deadlines depend on the entity, employees, plan documents, and applicable law. Contribution figures shown are for 2026.