For self-employed individuals, S-corp owner-employees, and small business owners, the choice of retirement plan is one of the highest-leverage tax planning decisions available. Contributions are generally deductible as business expenses (or, for employees, reduce taxable wages), and the deduction reduces income subject to self-employment tax for sole proprietors and partnerships, not just income tax. The three plans practitioners most commonly advise on for small businesses are the SEP IRA (Simplified Employee Pension), the SIMPLE IRA (Savings Incentive Match Plan for Employees), and the Solo 401(k) (also called a one-participant 401(k) or individual 401(k)).
IMPORTANT: VERIFY ALL LIMITS AND RULES AT IRS.GOV
Contribution limits, catch-up contribution amounts, and compensation thresholds for all retirement plan types are indexed annually for inflation. Verify the current year's limits at IRS.gov before advising any client. The amounts discussed in this guide are illustrative of the statutory structure, not a statement of any current specific dollar limits. Additionally, the SECURE 2.0 Act of 2022 (enacted December 29, 2022) made numerous changes to small business retirement plans, many effective in 2024, 2025, and 2026. SECURE 2.0 provisions are subject to ongoing IRS regulatory guidance with staggered effective dates; verify all current effective dates and implementing rules at IRS.gov before advising clients.
This guide is for informational purposes only and does not constitute legal or tax advice. All procedures, thresholds, and rules must be verified at IRS.gov before being relied on in any client matter.
Section 1: Why Retirement Plan Selection Matters at Tax Season
Retirement plan contributions are deductible as business expenses on the employer's return: Schedule C for sole proprietors, Form 1065 for partnerships, Form 1120-S for S-corps. For sole proprietors and partners, contributions also reduce net self-employment income, which lowers the base on which self-employment tax is calculated under IRC 1401. This dual benefit (income tax and SE tax reduction) is what separates retirement plan contributions from most other business deductions.
For S-corp owner-employees, the employer contribution is made by the S-corp and deducted on the corporate return. The employee deferral component (for plans that offer it) reduces the owner-employee's W-2 taxable wages. Because S-corp owners do not pay self-employment tax on distributions, the plan mechanics differ from sole proprietor situations; the interaction with S-corp reasonable compensation is particularly important, because the employer profit-sharing contribution base for an S-corp owner is W-2 wages, not distributions.
Practitioners should also note that retirement plan contributions reduce W-2 wages or net SE income, which may affect the Section 199A qualified business income deduction. The QBI deduction for specified service trades or businesses and for owners above the income threshold is limited by a W-2 wage component. See the Section 199A QBI guide for how retirement plan contributions interact with the QBI deduction calculation.
The plan selection decision is highest-stakes when a client comes in late in the tax year or after year-end, because the three plans have meaningfully different establishment and funding deadlines. A practitioner who advises a client on the wrong plan type at the wrong time can cost that client the entire deduction for the year.
Section 2: SEP IRA -- Simplicity and High Limits for Self-Employed
What It Is
A SEP IRA (Simplified Employee Pension) is an employer-funded plan. The employer, which can be a sole proprietor, partnership, S-corp, or C-corp, contributes to traditional IRA accounts established for each eligible employee. The mechanics are straightforward: the employer executes a written plan document (commonly IRS Form 5305-SEP), each eligible employee opens a SEP IRA at a financial institution of the employer's choosing, and the employer deposits contributions directly into each employee's account.
Contribution Limits
The employer can contribute up to 25% of each eligible employee's compensation, subject to an annual dollar maximum (verify the current annual dollar limit and compensation cap at IRS.gov; these are indexed annually). For self-employed individuals, the effective rate is approximately 20% of net self-employment income due to the interaction between the SE tax deduction under IRC 164(f) and the contribution calculation. The practical result: a sole proprietor cannot simply take 25% of their Schedule C net profit; the calculation requires a circular computation that most tax software handles automatically but practitioners should understand conceptually.
REGULATORY HEDGE: SEP CONTRIBUTION LIMITS
The annual SEP contribution dollar cap and the eligible compensation ceiling are both indexed annually. This guide does not state specific dollar amounts because any figure could be superseded. Verify the current annual dollar limit and compensation ceiling at IRS.gov before computing or advising on a SEP contribution for any client.
No Employee Deferrals
Employees cannot make salary deferrals to a SEP IRA. All contributions come from the employer. This is a key structural distinction from both the SIMPLE IRA and the Solo 401(k). An employee who wants to make their own retirement contributions in addition to what the employer contributes must do so through a separate IRA, subject to the applicable traditional or Roth IRA contribution limits (verify at IRS.gov).
Establishment and Funding Deadline
The SEP is the most forgiving plan for late-planning clients. A SEP can be established and funded as late as the employer's tax return due date, including extensions. A sole proprietor on automatic extension through October 15 can establish and fund a SEP for the prior tax year until that date. This makes the SEP the only plan of the three that can be set up after the calendar year closes and still generate a prior-year deduction.
Employee Coverage Rules
A SEP must cover all eligible employees who: (1) are at least 21 years old, (2) have worked for the employer in at least 3 of the last 5 years, and (3) received at least a minimum amount of compensation in the current year (verify the current compensation threshold at IRS.gov; it is indexed periodically). An employer who funds a generous SEP for themselves must also fund it for every eligible employee at the same percentage of compensation. This pro-rata requirement makes SEPs expensive for employers with multiple eligible employees. For sole proprietors and single-member owner-only firms, it remains the simplest high-limit plan with no annual reporting.
Administrative Obligations
SEP IRAs generally do not require annual Form 5500 filing. There is no Roth contribution option and no loan provision under a SEP IRA. Assets in a SEP IRA are subject to the standard 10% early withdrawal penalty (plus ordinary income tax) for distributions before age 59 1/2, with the same exceptions that apply to traditional IRAs.
Section 3: SIMPLE IRA -- Employee Participation, Lower Limits
What It Is
A SIMPLE IRA (Savings Incentive Match Plan for Employees) allows employees to make salary deferrals, and the employer must make either a matching contribution or a non-elective contribution. The SIMPLE IRA is available only to employers with 100 or fewer employees who received at least a minimum amount of compensation from the employer in the prior year (verify the current compensation threshold and employee count rules at IRS.gov). For small employers who want employees to have a meaningful stake in their own retirement savings, the SIMPLE IRA provides that mechanism at a lower administrative burden than a traditional 401(k).
Employee Deferrals
Employees can defer up to the annual SIMPLE IRA limit (verify the current annual limit at IRS.gov; indexed annually). Participants age 50 or older can make a standard catch-up contribution above the base limit (verify the current catch-up amount at IRS.gov). Under SECURE 2.0, participants aged 60, 61, 62, or 63 can make an enhanced "super catch-up" contribution beginning in 2025; the SIMPLE IRA super catch-up is capped at 110% of the standard catch-up limit for the year (verify the current super catch-up amount and eligibility rules at IRS.gov before advising any client on this provision).
REGULATORY HEDGE: SIMPLE IRA LIMITS AND SECURE 2.0
The SIMPLE IRA base deferral limit, standard catch-up limit, and SECURE 2.0 super catch-up limit are all indexed annually. The SECURE 2.0 super catch-up provision has a staggered effective date and is subject to ongoing IRS regulatory guidance. Verify all current limits, effective dates, and implementing rules at IRS.gov before advising any client on SIMPLE IRA contribution amounts.
Employer Contribution Options
The employer must choose one of two mandatory contribution formulas each year:
Matching contribution (up to 3% of compensation)
The employer matches each participating employee's deferral dollar-for-dollar, up to 3% of the employee's compensation for the year. The employer may reduce the match to as low as 1% of compensation in no more than 2 out of every 5 years, provided the employer gives employees proper advance notice of the reduced match rate. The reduced-match election requires specific timing and notice procedures; verify the current notice and election requirements at IRS.gov before using the reduced match in any year.
Non-elective contribution (2% of compensation)
The employer contributes 2% of each eligible employee's compensation (up to the applicable annual compensation ceiling; verify the current compensation cap at IRS.gov), regardless of whether the employee makes any deferral. This option favors employers whose workforce has low participation rates, because the contribution is made uniformly regardless of employee elections. SECURE 2.0 made changes to the permissible employer contribution amounts under certain circumstances; verify current SECURE 2.0 SIMPLE IRA provisions at IRS.gov.
Establishment Deadline
A SIMPLE IRA must be established by October 1 of the year for which it will be effective. It cannot be established retroactively like a SEP. This is a critical planning distinction: a client who arrives in November asking about retirement plan options for the current tax year cannot establish a new SIMPLE IRA for that year. The practitioner's options at that point are limited to the SEP IRA (if no existing plan is in place) or a Solo 401(k) (if established by December 31 and the business is owner-only). Employee deferrals from the payroll connect to the SIMPLE IRA in a way that also implicates payroll deposit timing obligations; see the Form 941 payroll tax compliance guide for the deposit rules that interact with SIMPLE IRA deferral timing.
The Two-Year Rule
Funds in a SIMPLE IRA are subject to a 25% early withdrawal penalty (rather than the standard 10%) during the first two years of the participant's participation in the plan. After the two-year period, the standard 10% penalty (plus ordinary income tax) applies to early distributions. Practitioners must advise clients of this before establishing a SIMPLE IRA, particularly clients who have limited liquidity and might need access to retirement funds within that window. The two-year clock runs from the date the first contribution was deposited to the participant's SIMPLE IRA account, not from the plan establishment date.
Administrative Obligations
SIMPLE IRAs generally do not require annual Form 5500 filing. There is no Roth contribution option under a SIMPLE IRA and no loan provision. Employer contributions are immediately 100% vested; the employer cannot impose a vesting schedule.
Section 4: Solo 401(k) -- Maximum Contributions for Owner-Only Businesses
What It Is
A Solo 401(k), also called an individual 401(k) or one-participant 401(k), is available to self-employed individuals and business owners with no employees other than the owner and the owner's spouse. It operates under the same statutory framework as a traditional 401(k) plan but is exempt from most ERISA requirements because it has no non-owner employees. The plan combines an employee salary deferral component with an employer profit-sharing component, and the interaction between the two is what makes it the highest-contribution option for owner-only businesses at moderate income levels.
Two Contribution Components
The Solo 401(k) has two separate contribution buckets that combine toward the overall annual defined contribution limit (verify the current limit at IRS.gov):
Employee salary deferral
The owner can defer up to the annual 401(k) elective deferral limit (verify the current limit at IRS.gov; indexed annually), plus a standard catch-up contribution if age 50 or older. Under SECURE 2.0, participants aged 60, 61, 62, or 63 are eligible for a "super catch-up" beginning in 2025; verify the current super catch-up amount and eligibility rules at IRS.gov. The deferral election must be made by December 31 of the plan year, even if the actual deposit can be made later.
Employer profit-sharing contribution
The employer (the business entity) can contribute up to 25% of the owner's compensation. For an S-corp owner, the base is W-2 wages paid by the S-corp (not distributions). For a sole proprietor or partner, the base is net self-employment income after the SE tax deduction, computed using the same circular calculation that applies to SEP IRAs. The employee deferral and employer profit-sharing contributions together are subject to the overall annual defined contribution limit (verify at IRS.gov).
REGULATORY HEDGE: SOLO 401(k) LIMITS
The annual elective deferral limit, the catch-up contribution limit, the super catch-up limit (SECURE 2.0), and the overall defined contribution limit applicable to Solo 401(k) plans are all indexed annually. Verify the current year's limits at IRS.gov before computing or advising on any Solo 401(k) contribution. Do not rely on figures from prior-year returns or printed guides without confirming against the current IRS.gov publication.
Why the Solo 401(k) Often Beats the SEP IRA for Self-Employed
Because the employee deferral fills the contribution bucket first before the 25% employer profit-sharing rule is applied, a self-employed individual with relatively modest net income can often contribute substantially more through a Solo 401(k) than through a SEP IRA. Under a SEP, the contribution is always capped at approximately 20% of net SE income regardless of income level. Under a Solo 401(k), the owner can max the employee deferral (up to the annual limit) first, then add an employer profit-sharing contribution on top.
For illustration only (verify all current limits at IRS.gov before using any figures with a client): a sole proprietor with $80,000 of net self-employment income can contribute substantially more to a Solo 401(k) by maxing the employee deferral and adding a profit-sharing contribution, than to a SEP IRA, where the contribution is limited to approximately 20% of that net SE income. The breakeven point (where SEP and Solo 401(k) contributions converge) depends on the annual deferral limit in effect; practitioners should model both options for clients near the relevant income range and let the current limits drive the recommendation.
Roth Option
Some Solo 401(k) plan documents permit Roth contributions within the employee deferral component. A Roth deferral is made on an after-tax basis and grows tax-free, with qualified distributions tax-free in retirement. The availability of the Roth option depends entirely on the plan document; not all Solo 401(k) providers include a Roth feature. Practitioners advising clients who want Roth retirement savings should confirm the plan document permits Roth deferrals before establishing the plan.
Loan Option
Solo 401(k) plans can permit participant loans, unlike SEP IRAs or SIMPLE IRAs. Plan loan rules are governed by IRC 72(p). Generally, a participant can borrow up to 50% of their vested account balance, not to exceed a stated maximum dollar amount (verify the current loan maximum at IRS.gov). Loans must be repaid within five years (except for home purchase loans, which may have a longer term) with at least quarterly interest payments at a reasonable rate. A loan that fails to meet the IRC 72(p) requirements is treated as a taxable distribution subject to ordinary income tax and the 10% early withdrawal penalty. Whether a specific Solo 401(k) plan document permits loans is a plan-level determination, not a statutory guarantee; check the plan document before advising a client that a loan is available.
Form 5500-EZ Filing Obligation
A Solo 401(k) with plan assets exceeding the applicable annual threshold must file Form 5500-EZ annually (verify the current threshold at IRS.gov; as of recent years this has been $250,000 in plan assets at year-end). SEP IRAs and SIMPLE IRAs generally do not have a comparable annual filing requirement. The Form 5500-EZ deadline is generally July 31 following the close of the plan year for calendar-year plans. Failure to file is subject to a civil penalty of $250 per day up to a stated maximum (verify the current penalty amounts at IRS.gov). If a client has failed to file Form 5500-EZ for prior years, the IRS has a Delinquent Filer Voluntary Compliance (DFVC) program that may allow reduced penalties; see the IRS penalty abatement guide for context on penalty relief procedures. Many Solo 401(k) owners are unaware of this obligation; practitioners should identify affected clients at plan inception and calendar the filing deadline.
Establishment and Contribution Deadlines
A Solo 401(k) must be established by December 31 of the tax year for which contributions are to be made. Unlike the SEP, a tax return extension does not extend the plan establishment deadline. The employee deferral election must also be made by December 31. However, the employer profit-sharing contribution can be deposited up to the employer's tax return due date including extensions, mirroring the SEP funding deadline for that component only. Practitioners should calendar both deadlines separately for Solo 401(k) clients.
Section 5: SECURE 2.0 Act Updates for Small Business Plans
The SECURE 2.0 Act of 2022 made numerous changes affecting small business retirement plans, with provisions taking effect across 2024, 2025, and 2026. This section highlights the provisions most relevant to practitioners advising small business clients. All SECURE 2.0 provisions are subject to ongoing IRS regulatory guidance, and many have staggered effective dates. Verify all current effective dates, transitional relief, and implementing rules at IRS.gov before advising any client.
Automatic Enrollment Requirement (New 401(k) Plans)
Beginning in 2025, most new 401(k) and 403(b) plans must automatically enroll eligible employees at a default deferral rate within a specified range, with the rate automatically increasing each year. Small businesses with 10 or fewer employees are exempt, and plans in existence for fewer than 3 years are also exempt. This requirement does not affect SIMPLE IRAs or SEP IRAs. Hedge: verify the current automatic enrollment requirements, all applicable exemptions, the effective date, and any transitional relief at IRS.gov before advising any client establishing a new 401(k) plan.
Super Catch-Up Contributions (Ages 60-63)
Beginning in 2025, participants aged 60, 61, 62, or 63 can make enhanced catch-up contributions above the normal catch-up limit for 401(k) and SIMPLE IRA plans. For SIMPLE IRAs, the super catch-up is capped at 110% of the standard catch-up limit for the year. This provision creates a meaningful planning window for clients in their early 60s who want to accelerate retirement savings before Social Security claiming age. Verify the current super catch-up amounts, eligibility ages, and plan-type applicability at IRS.gov; these amounts are indexed annually.
Roth Catch-Up Requirement for High Earners
Under SECURE 2.0 as enacted, participants with wages above a specified threshold (in a prior calendar year) must make catch-up contributions as Roth (after-tax) contributions rather than pre-tax contributions. This provision, originally scheduled for 2024, has been subject to IRS postponements and transitional relief. The current effective date for the Roth catch-up mandate should be verified at IRS.gov before advising any client, as IRS guidance on this provision has evolved since enactment. Practitioners should monitor IRS notices and publications for the current implementation status.
Other SECURE 2.0 Provisions Affecting Small Business Plans
SECURE 2.0 also includes provisions permitting certain defined contribution plans to add linked emergency savings accounts (Pension-Linked Emergency Savings Accounts), expanded the ability of certain employers with SIMPLE IRAs to make additional employer contributions, and provided a small business startup credit enhancement for employers establishing new retirement plans. Each provision has its own effective date and qualification rules. Verify the current rules, effective dates, and implementing guidance for any specific SECURE 2.0 provision at IRS.gov before advising clients.
Section 6: Comparison -- Choosing the Right Plan
The table below summarizes the primary structural characteristics of each plan type. All entries reflect general plan characteristics; contribution limits, thresholds, and filing requirements change annually. Verify current rules at IRS.gov before advising any client.
| Factor | SEP IRA | SIMPLE IRA | Solo 401(k) |
|---|---|---|---|
| Who can establish | Any employer (sole proprietor, S-corp, C-corp, partnership) | Employers with 100 or fewer employees (verify threshold at IRS.gov) | Owner-only businesses (no non-owner employees) |
| Employee deferrals | No | Yes (up to annual limit; verify at IRS.gov) | Yes (up to annual limit, plus catch-up; verify at IRS.gov) |
| Employer contribution | Up to 25% of compensation (verify annual dollar cap at IRS.gov) | Mandatory: match up to 3% or 2% non-elective (verify at IRS.gov) | Up to 25% of compensation as profit-sharing (verify at IRS.gov) |
| Establishment deadline | Tax return due date including extensions | October 1 of the plan year | December 31 of the plan year |
| Form 5500 | Generally not required | Generally not required | Form 5500-EZ required if plan assets exceed threshold (verify at IRS.gov) |
| Roth option | No | No | Depends on plan document |
| Loan option | No | No | Depends on plan document |
| Best fit | Solo practitioners; late-year or post-filing planning; high contribution with minimal administration | Employers with employees who want employee participation in retirement saving | Owner-only businesses seeking maximum contributions at moderate income levels |
Note: all column entries reflect general plan characteristics. Contribution limits, compensation thresholds, and filing thresholds change annually. Verify current rules at IRS.gov before advising any client or relying on any entry in this table.
Section 7: Deductibility and Contribution Deadlines
Employer contributions to SEP IRAs, SIMPLE IRA employer match or non-elective contributions, and Solo 401(k) employer profit-sharing contributions are deductible as business expenses. Where the deduction appears on the return depends on entity type:
- Sole proprietors: deduct employer contributions on Schedule C (self-employed retirement plan deduction line) or Schedule 1, depending on plan type and filing method. Net SE income is reduced by the deductible contribution, which lowers SE tax as well as income tax.
- Partnerships: employer contributions are deducted on Form 1065 and flow through to partners. Each partner's guaranteed payment and distributive share allocation interact with the contribution base in ways that require careful attention to each partner's individual plan calculation.
- S-corps: the employer profit-sharing contribution is deducted by the S-corp on Form 1120-S. The owner-employee's W-2 wages are the contribution base for the employer component. The employee deferral component (for Solo 401(k) or SIMPLE IRA) reduces the owner-employee's W-2 Box 1 taxable wages. See the S-corp reasonable compensation guide for the interaction between W-2 wage levels and the employer contribution base.
Contribution Deadlines by Plan Type
- SEP IRA: employer contribution can be made up to the employer's tax return due date including extensions (for example, October 15 for a sole proprietor on calendar-year extension). No prior-year election is required; the establishment and funding occur simultaneously.
- SIMPLE IRA employee deferrals: withheld amounts must be deposited to the employees' SIMPLE IRA accounts no later than the earlier of: (a) the date the amounts can reasonably be segregated from the employer's general assets, or (b) 30 days after the month in which the amounts were withheld. Late deposits are a plan failure and an excise tax issue under IRC 4975. The deposit timing rules connect directly to payroll compliance obligations; see the Form 941 payroll tax compliance guide for the related payroll deposit framework. Verify the current SIMPLE IRA deposit deadline rules at IRS.gov.
- SIMPLE IRA employer contributions: employer matching or non-elective contributions are due by the employer's tax return filing deadline for the year, including extensions.
- Solo 401(k) employee deferral: the deferral election must be in effect by December 31 of the plan year. For a sole proprietor or single-member LLC, the "election" is typically documented in a resolution or written statement before year-end, even if the actual deposit is made in the following year before the return due date. Verify the current election documentation requirements with the plan provider and at IRS.gov.
- Solo 401(k) employer profit-sharing contribution: can be deposited up to the employer's tax return due date including extensions, the same as a SEP IRA employer contribution.
Verify all contribution and deduction deadlines at IRS.gov before advising clients. Plan type and entity type interact with deadline rules in ways that are not always intuitive, and relying on the wrong deadline can result in a missed deduction or a plan failure.
Items Requiring Verification Before Relying on This Guide
COMPLIANCE NOTICE: VERIFY ALL OF THE FOLLOWING AT IRS.GOV
- Annual contribution limits, catch-up limits, and compensation caps for all three plan types: these are indexed annually and any figure in this guide may be superseded. Verify the current year's limits at IRS.gov before advising any client.
- SECURE 2.0 Act provisions: many provisions have staggered effective dates and are subject to ongoing IRS regulatory guidance. Verify current effective dates and implementing rules at IRS.gov before advising clients on any SECURE 2.0 provision, including the super catch-up, the Roth catch-up mandate, and the automatic enrollment requirement.
- Form 5500-EZ filing threshold and penalty amounts: verify the current dollar threshold above which a Solo 401(k) must file Form 5500-EZ and the current civil penalty amounts at IRS.gov.
- SIMPLE IRA employee eligibility compensation threshold: verify the current minimum compensation amount that makes an employee eligible for the SIMPLE IRA at IRS.gov.
- All contribution and deduction deadlines: plan type and entity type interact with deadline rules. Verify the specific deadline applicable to each client's plan type and entity type at IRS.gov before advising on timing of establishment or funding.
Related Guides
- S-Corp Reasonable Compensation Practitioner Guide -- S-corp owner-employee compensation affects the employer profit-sharing contribution base for Solo 401(k) plans; the W-2 wage level is the input for the 25% employer contribution calculation.
- Section 199A QBI Deduction Practitioner Guide -- retirement plan contributions reduce W-2 wages or net SE income, which may affect the QBI deduction calculation for clients above the income threshold.
- Form 941 Payroll Tax Compliance Guide -- SIMPLE IRA employee deferral deposit requirements connect to payroll obligations and the deposit schedule rules under IRC 6656.
- IRS Penalty Abatement Practitioner Guide -- relevant for clients facing Form 5500-EZ late filing penalties; penalty abatement procedures and the IRS Delinquent Filer Voluntary Compliance program may apply.
- IRC 401(a)/401(k) Qualified Plan Requirements and CODA -- practitioner guide to 401(k) plan qualification, CODA mechanics, elective deferral and annual addition limits, ADP/ACP testing, safe harbor elections, and OBBBA mandatory auto-enrollment and hardship expansion provisions.
- IRC 402 Qualified Plan Distributions, Rollovers, and NUA -- practitioner guide to 402(a) gross income inclusion, 60-day rollover and direct rollover mechanics, net unrealized appreciation lump-sum elections, mandatory 20% withholding rules, elective deferral limits, and OBBBA hardship distribution expansion.
Frequently Asked Questions
What is the difference between a SEP IRA, a SIMPLE IRA, and a Solo 401(k)?
A SEP IRA is an employer-only funded plan with no employee deferrals, available to any employer regardless of size, with contributions up to 25% of compensation (verify the current annual dollar cap at IRS.gov). A SIMPLE IRA allows employees to make salary deferrals and requires the employer to make either a matching or non-elective contribution; it is available only to employers with 100 or fewer employees. A Solo 401(k) is available only to owner-only businesses with no non-owner employees and combines an employee deferral with an employer profit-sharing contribution, allowing the highest total contribution at moderate income levels. Each plan has distinct establishment deadlines, employee coverage rules, and administrative obligations. Verify current contribution limits, thresholds, and rules for all three plan types at IRS.gov before advising any client.
Can a self-employed person contribute to both a SEP IRA and a Solo 401(k) in the same year?
Generally, a self-employed individual cannot maintain both a SEP IRA and a Solo 401(k) for the same business in the same year and benefit from both on that same self-employment income. The annual defined contribution limit (verify at IRS.gov) applies in aggregate across all plans maintained by the same employer for the same participant. However, specific coordination rules apply when a self-employed individual has multiple separate businesses. The interaction is complex and fact-specific; verify the current aggregation and coordination rules at IRS.gov and consult IRC 415 and the applicable regulations before advising a client who believes they can contribute to both simultaneously.
When must a small business retirement plan be established?
The establishment deadline depends on the plan type. A SEP IRA can be established and funded as late as the employer's tax return due date including extensions, making it the most flexible option for year-end or post-filing planning. A SIMPLE IRA must be established by October 1 of the year for which it will be effective and cannot be set up retroactively. A Solo 401(k) must be established by December 31 of the tax year, even though the employer profit-sharing contribution can be funded up to the return due date with extensions. The employee deferral election for a Solo 401(k) must also be made by December 31. Verify all establishment and funding deadlines at IRS.gov; the deadline that applies depends on both the plan type and the entity type.
What is Form 5500-EZ and who must file it?
Form 5500-EZ is the annual information return required for a one-participant (Solo) 401(k) plan whose total plan assets exceed the applicable filing threshold (verify the current threshold at IRS.gov; as of recent years this has been $250,000 in plan assets at year-end). SEP IRAs and SIMPLE IRAs generally do not require Form 5500-EZ. The filing deadline is generally July 31 following the close of the plan year. Failure to file is subject to a civil penalty of $250 per day up to a stated maximum (verify current penalty amounts at IRS.gov). Penalty relief may be available through the IRS Delinquent Filer Voluntary Compliance program. Many Solo 401(k) plan owners are unaware of this obligation; practitioners should identify affected clients and calendar the deadline at plan inception.
How did the SECURE 2.0 Act change small business retirement plans?
The SECURE 2.0 Act of 2022 made several changes affecting small business retirement plans, with many provisions taking effect in 2024, 2025, and 2026. Key changes include: a new automatic enrollment requirement for most new 401(k) plans beginning in 2025 (with exemptions for small businesses and new plans; verify at IRS.gov); enhanced "super catch-up" contributions for participants aged 60 through 63 in 401(k) and SIMPLE IRA plans beginning in 2025 (verify current amounts at IRS.gov); and a requirement that high earners make catch-up contributions as Roth contributions beginning in 2026, subject to IRS postponements (verify the current effective date at IRS.gov before advising any client). SECURE 2.0 also modified certain SIMPLE IRA employer contribution rules. All SECURE 2.0 provisions are subject to ongoing IRS regulatory guidance; verify current effective dates, transitional relief, and implementing rules at IRS.gov.
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