Retirement Plans for Business Owners

A 401(k) has two layers. What you defer from your own pay is capped at $24,500 for 2026, plus an $8,000 catch-up at age 50 and older, or $11,250 for ages 60 through 63. The company can add profit-sharing contributions (money the business contributes for employees, usually as a percentage of pay), and the two together are capped by IRC §415(c) at $72,000 per person for 2026, not counting catch-ups. Once both layers are full, a larger annual deduction requires adding a DB Plan or Cash Balance Plan. When both kinds of plan cover the same people, company profit-sharing contributions above 6% of pay count toward a combined deduction limit (IRC §404(a)(7)), so the two plans are usually designed together.

A DB Plan (defined benefit plan) is a traditional pension: the plan first promises how much each participant will receive per year in retirement, and an actuary, a credentialed professional who calculates what a pension plan must set aside, works backward from age, pay, years to retirement and assumed returns to set the company’s annual contribution. The law caps the future annual benefit, not the contribution: for 2026, IRC §415(b) limits it to $290,000 a year and to no more than the participant’s average pay over his or her highest three consecutive years. Under the same cap, the closer you are to retirement age, the less time there is to fund it and the larger the allowable annual contribution, so for owners over 50 with high, steady income the deduction is often well above what a 401(k) allows; the actual figure can only come from the plan’s actuary.

A Cash Balance Plan is legally a DB Plan that expresses the promised benefit as an account balance. Each year the plan credits each participant with a pay credit, such as a percentage of pay or a flat amount, and an interest credit at a rate the plan specifies. The account is a bookkeeping record: gains and losses on the plan’s actual investments do not change the amount promised to each person, so the company makes up any shortfall when returns fall below the credited rate, and returns well above it can reduce what may be contributed later. Compared with a traditional DB Plan, it is easier to explain to employees and makes it easier to set different pay credits for owners and staff.

Generally, yes. Qualified plans must pass coverage and nondiscrimination tests, which means they cannot benefit only owners and highly paid employees, and a DB-type plan must also cover the lesser of 50 employees or 40% of all employees, and at least two people if the company has more than one employee. Employees who are 21 and have a year of service generally have to be brought in. Headcount, ages and pay therefore decide how much the owner can save and how much the company spends on staff: a company of one owner, or an owner and spouse, avoids the issue, while a larger staff that is older than the owner can make the plan too expensive to be worthwhile. Before anything is designed, the TPA runs the tests on the actual employee census.

A DB-type plan has a minimum required contribution each year, calculated by the actuary; falling short triggers an excise tax, and so does contributing more than the deductible limit. A plan can be amended or terminated, but the IRS expects qualified plans to be permanent, and ending one after a few years without a genuine business reason can draw scrutiny. Setup, annual actuarial and administration fees and the Form 5500 annual return are fixed costs, so a small contribution may not justify them. We therefore usually suggest considering a DB-type plan only after several years of consistently strong profits; owners with uneven income can set Cash Balance pay credits conservatively and keep the flexibility in the profit-sharing layer, which can be decided, or skipped, each year.