Solo 401(k), SEP-IRA, or defined benefit plan: which fits a practice owner?
A solo 401(k) suits an owner-only business, optionally including a spouse, and reaches a high contribution level at a lower profit than other plans because the owner contributes both as employee and as employer. A SEP-IRA is simpler to administer but is funded entirely by employer contributions, which must be made at the same percentage of pay for every eligible employee. That uniformity makes it expensive once there is staff. A defined benefit or cash balance plan allows the largest deductible contributions by far and suits an owner with high, stable profit and a genuine intent to fund it for several years. Contribution ceilings for each are indexed annually and should be confirmed for the year in question.
Can I still set up a retirement plan for last year?
For employer contributions, often yes. The SECURE Act allows an employer to adopt a new qualified plan as late as the due date of the business's tax return for that year, including extensions, and still make deductible employer contributions for it. Employee salary deferrals are narrower. Deferring salary ordinarily requires the plan and a deferral election to have been in place while the compensation was being earned, so deferrals generally cannot be created retroactively. Internal Revenue Code Section 401(b)(2) carves out one case: an individual who owns the entire interest in an unincorporated trade or business and is its only employee may make elective deferrals for the plan's first plan year up to the due date of that individual's return for the year, determined without regard to extensions. Outside that carve-out, a retroactively adopted plan funds the closed year with employer contributions rather than with deferrals.
Does hiring an employee end my solo 401(k)?
It ends the "solo" part. A one-participant plan keeps its simplified treatment only while the business has no employees other than the owner and a spouse. Once a non-spouse employee satisfies the plan's eligibility conditions, the plan becomes a regular qualified plan subject to coverage and nondiscrimination testing, and the annual Form 5500 filing obligation changes. The plan does not have to be terminated, but its administration and cost change, and the eligibility terms written into the original document determine how quickly that happens.
What is a cash balance plan?
A cash balance plan is a defined benefit plan that expresses each participant's benefit as a hypothetical account balance, which makes it look like a 401(k) to participants while remaining a pension plan legally. Contributions are actuarially determined rather than elective and can be several times the 401(k) ceiling, especially for an older owner with fewer years to fund. The trade-off is a real funding obligation: contributions are required annually, not discretionary, an actuary must certify the plan each year, and the plan is expected to be maintained for a period rather than opened and closed opportunistically.
Do I have to cover my staff in the practice retirement plan?
For a qualified plan, yes, subject to the eligibility rules written in the plan document, typically an age and service requirement. The design levers are in how the required contributions are allocated rather than in avoiding coverage. A safe harbor 401(k) design satisfies nondiscrimination testing in exchange for a fixed employer contribution, and a cross-tested or new comparability profit-sharing allocation can direct a larger share of the employer contribution to older or longer-service participants where the demographics permit it.
When do retirement plan contributions have to be deposited?
Employee salary deferrals must be deposited as soon as they can reasonably be segregated from the employer's general assets. For plans with fewer than 100 participants the Department of Labor provides a safe harbor of seven business days after the payroll date, and late deferral deposits are a reportable operational failure rather than a minor administrative lapse. Employer contributions run on a different clock: they must be deposited by the due date of the business tax return, including extensions, to be deductible for that year.
General educational information about United States federal tax rules, current as of the review date above. Tax law changes and every situation turns on its own facts. This is not tax, legal, or financial advice and does not create a client relationship. Inflation-adjusted figures should be confirmed for the year in question before relying on them.
