A 55-year-old dentist with four employees in their twenties wants to maximize his own contributions. Pick the wrong plan and you either cap him at a fraction of what is possible or saddle the practice with mandatory contributions it cannot afford.
Plan selection balances two goals: maximize the owner's benefit while meeting regulatory requirements for rank-and-file employees. Every design feature exists at this intersection.
DC plans specify the contribution. The account balance at retirement depends on investment performance. Employee bears the risk. Capped at $72,000 annual additions (2026).
DB plans promise a specific benefit. Annual contributions are actuarially determined. Employer bears the risk. Max annual benefit: $290,000. DB plans allow far larger contributions for older participants. A 55-year-old owner needs massive annual funding to reach the benefit target by 65. A 28-year-old employee needs very little, the math has decades to work.
This age asymmetry drives most owner-focused plan design.
Employer-only contributions. Same percentage for everyone. Up to 25% of compensation (for a sole proprietor, 20% of net SE income after the deduction for one-half of SE tax), capped at...
Common mistakes
- Confusing SEP and SIMPLE contribution mechanics. SEP = employer-only at a uniform percentage. SIMPLE = employee deferrals plus mandatory employer match/non-elective. If the question mentions employee salary deferrals, SEP is eliminated. Trap: "$72,000" as a SIMPLE limit, that is the DC annual additions ceiling.
- Forgetting the age-55 separation exception after an IRA rollover. Distributions from an employer plan after separating from service at age 55+ are penalty-free. Roll to an IRA, the exception is lost. Trap: recommending a rollover for a 56-year-old who needs access.
- Overlooking the 100-employee SIMPLE limit. If the question mentions 120 employees, SIMPLE is off the table. Trap: SIMPLE as an answer for a 120-person company.
Bottom line
- DB plans allow the largest contributions for older, high-earning owners; actuarial cost scales with proximity to retirement.
- SEP: employer-only, same percentage for all, no deferrals, immediate vesting, cheap to administer but expensive once staff are added.
- SIMPLE: $17,000 deferral cap ($18,100 at an employer with 25 or fewer employees), 100 or fewer employees, low ceiling for high earners.
- Cross-tested profit-sharing skews contributions toward older, higher-paid owners by testing on a benefits basis, not contributions.
Exam shortcut
DECISION: older owner + young staff (large age gap) → DB or cash balance + 401(k) plan layering; volatile cash flow + HCE retention → Safe Harbor 401(k) + discretionary cross-tested profit-sharing; ≤100 employees + minimize admin → SIMPLE IRA; solo or near-solo → SEP-IRA. "SEP = Solo Employer Pays": same percentage for everyone, no deferrals. "SIS = Same-day Immediate Security": SEP, SIMPLE, and Safe harbor all vest immediately.
The full lesson (about 3,135 words, 21 min read) adds 8 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- F.50
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