The right plan depends less on the IRS limits than on your payroll, your age compared with your employees’ ages, and how steady your profits are. Designing and overseeing these plans is the core of my retirement plan services for businesses, and below I walk through the same questions I cover with owners.
The 2026 numbers that drive every plan
Every plan below is built from these 2026 limits (IRS Notice 2025-67).
| Limit | 2026 amount | What it controls |
|---|---|---|
| 401(k) elective deferral (402(g)) | $24,500 | What an employee (including you) can defer from pay |
| Catch-up, age 50 and over | $8,000 | Extra deferral, on top of the $24,500 |
| Catch-up, ages 60 to 63 | $11,250 | Replaces the $8,000 for people who turn 60, 61, 62 or 63 in 2026 |
| Annual addition limit (415(c)) | $72,000 | Total of deferrals, match and profit sharing to one person’s account, not counting catch-up |
| Defined benefit limit (415(b)) | $290,000 | Maximum annual benefit a pension or cash balance plan can provide |
| Compensation cap (401(a)(17)) | $360,000 | Most pay that can count in any formula |
| Highly compensated employee | $160,000 | Pay threshold (from the prior year) for nondiscrimination testing |
| Roth catch-up wage threshold | $150,000 | Above this in prior-year FICA wages, catch-up must go in as Roth |
| SIMPLE deferral | $17,000 ($18,100 for many small employers) | What an employee can defer into a SIMPLE IRA or SIMPLE 401(k) |
A defined contribution plan (SEP, SIMPLE, 401(k), profit sharing) promises a contribution. A defined benefit plan (including cash balance) promises a benefit at retirement, and an actuary works backward to the contribution needed to fund it. That is why defined benefit plans can accept so much more for an older owner.
New for 2026: if your FICA wages from the business were over $150,000 in 2025, your catch-up must be Roth (after tax). That reaches S corporation owners paid on a W-2, but not sole proprietors or partners, who have no FICA wages.
The menu: SEP, SIMPLE, safe harbor 401(k), profit sharing and cash balance
SEP-IRA
A SEP (Simplified Employee Pension) is an IRA-based plan funded only by the employer: up to 25% of each eligible employee’s pay, capped at $72,000, at the same percentage for everyone, including you. No testing, no Form 5500, and you can set one up as late as your tax deadline including extensions. The catch is no employee deferrals, so with staff, 20% for you means 20% for them. For a one-person business, I compare it with a solo 401(k) in SEP-IRA vs Solo 401(k).
SIMPLE IRA
A SIMPLE IRA is for employers with 100 or fewer employees. Employees can defer up to $17,000 in 2026 ($18,100 in many plans of employers with 25 or fewer employees), plus a $4,000 catch-up at 50 or $5,250 at ages 60 to 63. The employer either matches up to 3% of pay or gives everyone eligible 2%. It is cheap and simple, but the ceiling is low and you generally cannot run another plan beside it.
One side effect owners forget: SEP and SIMPLE IRA balances count for the backdoor Roth pro-rata rule, which I explain in the pro-rata rule that ruins a backdoor Roth for owners. Money inside a 401(k) does not.
Safe harbor 401(k)
A traditional 401(k) must pass annual tests comparing what owners and highly paid people defer with what everyone else defers. If staff save little, the owner’s deferrals get refunded. A safe harbor 401(k) skips those tests in exchange for a required, immediately vested employer contribution:
- Nonelective: 3% of pay to every eligible employee, whether or not they defer, or
- Basic match: 100% of the first 3% of pay deferred, plus 50% of the next 2% (a 4% maximum), or an enhanced match of at least that much.
When the owner wants the full $24,500, safe harbor is the starting point. I usually prefer the 3% nonelective version when profit sharing will be added, because it also counts in the profit-sharing tests. New 401(k) plans set up after December 29, 2022 generally must auto-enroll employees from 2025 plan years, but businesses with 10 or fewer employees or less than three years old are exempt.
401(k) with profit sharing
Profit sharing is a discretionary employer contribution on top of the 401(k): you decide each year whether and how much, up to $72,000 per person and a deduction limit of 25% of eligible payroll (deferrals do not count against the 25%). Despite the name, you do not need profits. For an owner under 50 it tops out at $72,000: $24,500 deferred plus $47,500 of employer money. With catch-up, $80,000 at 50 and over, or $83,250 at ages 60 to 63.
Cash balance (defined benefit) plan
A cash balance plan is a defined benefit plan that reads like a 401(k) statement. Each participant has a hypothetical account that grows by a pay credit (a dollar amount or percentage of pay) and an interest credit (a fixed or index-linked rate). When someone leaves, the account can usually be taken as a lump sum and rolled to an IRA.
Behind the scenes, the employer invests one pooled account and must make up any shortfall against the promised interest credit. The ceiling is the $290,000 annual benefit limit, measured as a lifetime pension starting around 62, which converts to a lump sum of several million dollars. That is why an owner a decade or so from retirement can often contribute well into six figures a year. The benefit is also capped at 100% of your highest three-year average pay and reduced if you have fewer than 10 years in the plan, which is why the actuary’s work matters.
Side-by-side comparison
| SEP-IRA | SIMPLE IRA | Safe harbor 401(k) | 401(k) + profit sharing | + Cash balance plan | |
|---|---|---|---|---|---|
| Owner maximum (2026, under 50) | $72,000 (25% of pay) | $17,000 to $18,100 plus match | $24,500 plus safe harbor | $72,000 | Actuarially set, often six figures on top of the 401(k) |
| Employee deferrals | No | Yes | Yes | Yes | Not in the cash balance plan itself |
| Required staff contribution | Same % as owner | 2% or 3% match | 3% or match | Safe harbor plus any profit-sharing minimum | Pay credits plus a minimum in the 401(k) |
| Flexibility year to year | High | Low | Medium | High (profit sharing is discretionary) | Low (contributions are required) |
| Typical fit | Solo owner or few staff | Small payroll, tight budget | Owner wants full deferral | Profitable owner, wants flexibility | Profitable owner 50+, steady income |
How a profit-sharing contribution is allocated
Profit sharing is where an owner can legally tilt employer money toward themselves, within limits.
Pro rata. Everyone gets the same percentage of pay. At 10%, an employee earning $60,000 gets $6,000 and you (at the $360,000 cap) get $36,000.
Integrated (permitted disparity). Because Social Security covers pay only up to the 2026 wage base of $184,500, a plan may give up to 5.7 percentage points extra (never more than the base rate) on pay above a set level, such as 5% on all pay plus 5% on pay above $184,500. A modest tilt toward higher earners, with no extra testing.
New comparability (cross-tested). Each group (often owners and staff) gets its own rate, and the plan tests by projecting contributions to retirement-age benefits. Money for a 58-year-old owner has fewer years to grow than money for a 28-year-old assistant, so a much higher owner rate can test as equal. Staff generally receive a “gateway” minimum, at most 5% of pay. It is the design I use most for a profitable owner with a younger team; the math is in new comparability plans let older owners take the biggest share.
In an S corporation, contribution room is figured on your W-2 salary, not K-1 distributions, so salary matters. See how much salary an S-corp owner should pay themselves.
How a cash balance plan stacked on a 401(k) works
For an owner in their 50s or 60s, the 401(k) and profit sharing top out around $80,000. A cash balance plan beside it opens a second, much larger bucket. The two plans are designed and tested together: the owner keeps full deferrals, staff typically receive 5% to 7.5% of pay across both plans, the owner’s profit sharing is often capped at 6% of pay, and the cash balance plan gives the owner a large pay credit and staff a smaller one.
The 6% rule. With both kinds of plan, the combined deduction is generally limited to the greater of 25% of eligible pay or what the defined benefit plan needs. Employer defined contribution money up to 6% of pay (and all employee deferrals) sits outside that limit, hence the 6% cap. The limit does not apply if the cash balance plan is insured by the Pension Benefit Guaranty Corporation (PBGC), which brings premiums. Owner-only plans and plans of professional service firms that have never had more than 25 active participants are generally not PBGC-covered. Your actuary and CPA should confirm which applies.
Worked example: a 58-year-old owner, 2026
This example is illustrative. Actual cash balance limits and staff costs depend on ages, pay, plan design, interest crediting and the actuary’s assumptions, and yours will differ.
Dr. Lee owns an S corporation dental practice. She is 58, pays herself a $360,000 W-2 salary, and has four employees earning a combined $240,000, all younger than she is. Her 2025 W-2 was also over $150,000.
Option A: safe harbor 401(k) with new comparability profit sharing
| Owner | Four staff | |
|---|---|---|
| Elective deferral | $24,500 (pre-tax) | Their own choice |
| Catch-up (age 58) | $8,000 (must be Roth) | |
| Safe harbor plus profit sharing | $47,500 | About 5% of pay = $12,000 |
| Total | $80,000 | $12,000 |
Option B: the same 401(k) plus a cash balance plan
| Owner | Four staff | |
|---|---|---|
| Elective deferral | $24,500 (pre-tax) | Their own choice |
| Catch-up | $8,000 (Roth) | |
| Profit sharing (owner limited to 6% of pay) | $21,600 | 3% safe harbor + 2% profit sharing = $12,000 |
| Cash balance pay credit (assumed) | $200,000 | 2.5% of pay = $6,000 |
| Total | $254,100 | $18,000 |
Checking the 6% rule: total employer defined contribution money is $21,600 for the owner plus $12,000 for staff, or $33,600. Total eligible pay is $600,000, and 6% of that is $36,000, so the design fits.
What changed. The owner’s total goes from $80,000 to $254,100, an extra $174,100. Staff contributions go from $12,000 to $18,000, an extra $6,000. In this illustration, roughly 97% of the new money lands in the owner’s account.
The tax effect. The pre-tax pieces in Option B are $24,500 + $21,600 + $200,000 = $246,100 (the Roth catch-up is not deductible). At the 37% top federal bracket, that could defer roughly $91,000 of federal income tax this year, compared with about $26,600 on the $72,000 of pre-tax money in Option A (its $80,000 less the $8,000 Roth catch-up). State tax, the 20% qualified business income deduction (which shrinks as business income falls) and the payroll cost of the salary all change the real answer, so your CPA should model the actual figures.
One caution: unlike profit sharing, the cash balance credit is not optional each year. The company is committed to the promised pay credits until the plan is amended going forward.
What these plans cost to run
The biggest cost is usually the staff contributions, which the example above shows how to measure. Then come administration and filings.
Administration. A 401(k) with profit sharing needs a recordkeeper (holds accounts, processes deposits) and a third-party administrator, or TPA (maintains the document, runs tests, prepares Form 5500). For a small plan that commonly runs a few thousand dollars a year. A cash balance plan adds an actuary, who sets the contribution range each year and signs Schedule SB of Form 5500, commonly several thousand dollars more.
Form 5500. These plans file Form 5500 (or 5500-SF) each year, due the last day of the seventh month after the plan year ends (July 31 for a calendar year), extendable by two and a half months with Form 5558. An owner-only plan files Form 5500-EZ once assets exceed $250,000. Late-filing penalties can be steep. Fund expenses inside the plan matter too, and keeping them reasonable is part of the employer’s fiduciary duty.
Employee requirements and nondiscrimination testing, at a high level
Plans keep their tax benefits only if they do not favor owners and highly paid people too much. Your TPA runs the tests, but they set your staff cost.
- Eligibility and coverage. A plan can generally require age 21 and a year of service (1,000 hours). Under SECURE 2.0, long-term part-timers with 500 hours in two consecutive years must be allowed to defer. The plan must cover enough rank-and-file employees relative to highly compensated ones.
- ADP and ACP tests. Compare deferral and match rates of highly compensated employees (more-than-5% owners, or pay over $160,000 last year) with everyone else. Safe harbor plans are generally exempt.
- Top-heavy rules. If key employees (generally owners, and officers paid over $235,000 in 2026) hold more than 60% of assets, staff generally get at least 3% of pay, which a 3% safe harbor contribution usually covers.
- General nondiscrimination test. How new comparability and combination plans pass, by projecting benefits.
- Minimum participation for a cash balance plan. It generally must benefit the lesser of 50 people or 40% of employees (at least two, if there are two or more).
- Vesting. Safe harbor contributions vest immediately. Profit sharing can vest over up to six years, and cash balance credits must vest in no more than three.
Most testing problems I see in small plans come from payroll data, not design: wrong pay definitions, missed eligible employees, late deposits.
Startup tax credits under SECURE 2.0
With 100 or fewer employees and no plan for the same employees in the past three years, three credits (claimed on Form 8881) may offset much of the cost.
Startup cost credit (first three years). With up to 50 employees, 100% of eligible setup and administration costs, up to the greater of $500 or the lesser of $250 per eligible non-highly compensated employee or $5,000 (50% for 51 to 100 employees). Eight such employees means up to $2,000 a year; 20 or more, up to $5,000. An owner-only plan does not qualify.
Employer contribution credit (first five years). With up to 50 employees, up to $1,000 per employee of employer contributions to a defined contribution plan, SEP or SIMPLE IRA: 100% in years one and two, then 75%, 50% and 25%. Employees paid over $110,000 in 2026 do not count, larger employers get less, and defined benefit contributions do not qualify.
Automatic enrollment credit. $500 a year for three years for adding eligible auto-enrollment.
For the four-employee practice above, that could mean up to $1,000 a year of startup credit and up to $1,000 per staff member of contribution credit in years one and two. Costs claimed as a credit cannot also be deducted.
Deadlines to set up a plan for 2026
This is where owners most often lose a year.
| Plan | Latest date to set up for 2026 (calendar-year business) |
|---|---|
| SIMPLE IRA | October 1, 2026 |
| New safe harbor 401(k) | Must be in effect for at least 3 months of the plan year, so effectively October 1, 2026 (allow time before that for documents and notices) |
| Add 3% safe harbor nonelective to an existing 401(k) | 30 days before year end (about December 1, 2026); with a 4% contribution, as late as the end of the next plan year |
| Profit sharing plan | Your business tax return due date, including extensions |
| Cash balance plan | Your business tax return due date, including extensions |
| SEP-IRA | Your tax return due date, including extensions |
Since the SECURE Act, a new profit-sharing or cash balance plan adopted by the tax filing deadline, including extensions, can count for the prior year. For a calendar-year S corporation that is March 15, 2027 (September 15 extended); for a sole proprietor or C corporation, April 15, 2027 (October 15 extended). Deferrals are different: they only come from pay earned after the 401(k) exists, except that a sole proprietor with no employees can adopt a solo 401(k) by the original return due date and still defer for the first year.
Profit sharing and cash balance contributions are deductible for 2026 if made by the 2026 return due date, including extensions. A cash balance plan’s minimum required contribution is due 8½ months after the plan year ends (September 15, 2027 for 2026), with quarterly installments in some cases.
How to choose
- Start with payroll, not limits. What can the business afford for staff in a slow year? I make that case in your payroll, not the IRS limits, picks your retirement plan.
- Look at the age and pay gap. An owner much older and better paid than the staff gets the most from new comparability and cash balance designs.
- Decide how much you want to save, and for how long. If $24,500 to $35,750 of deferrals is enough, a safe harbor 401(k) may do. For $80,000, add profit sharing. For well over $100,000 a year, sustainable for at least three to five years, look at a cash balance plan.
- Check the stability of profits. Profit sharing flexes; a cash balance plan expects steady funding and is meant to be permanent. Ending one within a few years without a business reason (a sale, a downturn) can invite IRS questions, so plan its termination alongside any exit.
- Compare the after-tax result, not the deduction. A deduction now is taxable income later. That trade usually favors an owner in a top bracket today who expects a lower one in retirement; owners facing very large required distributions may prefer Roth deferrals or a smaller design. This is where retirement plan design meets tax planning.
The One Big Beautiful Bill Act of 2025 did not change these plan limits, but it made the current brackets and the 20% qualified business income deduction permanent, which affects what every deduction above is worth.
How Modern Wealth can help
I help owners choose, design and oversee their company plan: comparing a SEP or SIMPLE with a safe harbor 401(k), modeling new comparability allocations, getting cash balance illustrations from an actuary, coordinating with your CPA and payroll provider, and serving as the plan’s fiduciary investment advisor. As a fee-only fiduciary, I am paid by you, not by funds or providers. I do not prepare tax returns or draft plan documents, so your CPA and TPA stay on the team.
Frequently asked questions
How many employees do I need to start a 401(k)?
None. An owner with no employees (other than a spouse) can use a solo 401(k), and a regular 401(k) has no minimum. Only SIMPLE IRAs cap the employer at 100 employees.
What is the difference between a 401(k) and a profit sharing plan?
A 401(k) lets employees defer their own pay; profit sharing is an employer contribution decided each year. Most small businesses combine them in one plan, limited together to $72,000 per person in 2026, plus catch-up.
Do I have to make a profit-sharing contribution every year?
No. It is discretionary, though contributions should be “substantial and recurring” over time. A safe harbor contribution, if your plan has one, is required each year.
What is the maximum contribution to a defined benefit plan in 2026?
There is no fixed dollar contribution limit. The limit is on the benefit: $290,000 a year as a lifetime pension starting around 62, or 100% of your highest three-year average pay if less. An actuary converts that into a contribution range based on your age, pay and years in the plan; for owners in their 50s and 60s it is often six figures.
Can I have a cash balance plan and a 401(k) at the same time?
Yes, and that is the most common setup. The plans are tested together, and when the cash balance plan is not PBGC-insured, owner profit sharing is usually capped at 6% of pay. You keep the full $24,500 deferral plus catch-up.
How much does a small business 401(k) cost?
Expect administration fees of a few thousand dollars a year, plus fund expenses and any required employer contributions. SECURE 2.0 credits can cover up to $5,000 a year of costs for three years and up to $1,000 per employee of contributions for five.
What happens to a cash balance plan if I sell or close the business?
It is usually terminated: the actuary sets final benefits, the company funds any shortfall, and participants generally roll lump sums to an IRA. Plan the timing alongside the sale.
This article is for general education and is not tax, legal or investment advice for your situation. Talk with your tax and legal advisors before acting.
Sources
- IRS Notice 2025-67, 2026 Amounts Relating to Retirement Plans and IRAs: https://www.irs.gov/pub/irs-drop/n-25-67.pdf
- IRS, 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500: https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500
- IRS Publication 560, Retirement Plans for Small Business: https://www.irs.gov/publications/p560
- IRS, Retirement plans startup costs tax credit: https://www.irs.gov/retirement-plans/retirement-plans-startup-costs-tax-credit
- IRS, Mid-year changes to safe harbor plans or safe harbor notices: https://www.irs.gov/retirement-plans/mid-year-changes-to-safe-harbor-plans-or-safe-harbor-notices
- IRS, Operational compliance list (SECURE Act safe harbor nonelective amendments): https://www.irs.gov/retirement-plans/operational-compliance-list
- IRS, Retirement topics: automatic enrollment: https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-automatic-enrollment
- IRS Notice 2024-2, Miscellaneous changes under the SECURE 2.0 Act: https://www.irs.gov/pub/irs-drop/n-24-02.pdf
- IRS, Form 5558 reminders: https://www.irs.gov/retirement-plans/form-5558-reminders
- 26 U.S.C. 401 (including 401(l) permitted disparity): https://www.law.cornell.edu/uscode/text/26/401
- 26 U.S.C. 404 (including 404(a)(7) combined deduction limit): https://www.law.cornell.edu/uscode/text/26/404
- 26 U.S.C. 415 (benefit and contribution limits): https://www.law.cornell.edu/uscode/text/26/415
- 26 CFR 1.401(k)-3 (safe harbor plan year requirements): https://www.law.cornell.edu/cfr/text/26/1.401(k)-3
- Social Security Administration, Contribution and Benefit Base: https://www.ssa.gov/oact/COLA/cbb.html
- U.S. Department of Labor, Fact Sheet: Cash Balance Pension Plans: https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/cash-balance-pension-plans
- PBGC, Professional service employer plan: https://www.pbgc.gov/guidance/professional-service-employer-plan