How do small business plans compare?
The short answer
For 2026, the law caps what goes into a SIMPLE IRA, a SEP IRA and a 401(k), and it caps the yearly benefit a defined benefit plan pays, $290,000, not the contribution. A defined benefit plan is the only one of these plans whose contribution an enrolled actuary sets each year, and the employer must pay at least the minimum. A taxable brokerage account has no limit and no deduction, and its earnings are taxed as they arise.
What are the retirement plan options for a small business owner?
A small business owner can offer a SIMPLE IRA, a SEP IRA, a 401(k) or a defined benefit plan, which includes the cash balance plan. The SIMPLE IRA, the SEP IRA and the 401(k) cap what goes in. A defined benefit plan caps the yearly benefit it pays, $290,000 for 2026, and an actuary sets the contribution.
The table below sets each plan’s 2026 limits and rules beside a taxable brokerage account, which is not a retirement plan at all. The figures for the next year will appear in the IRS’s next notice.
IRS, Types of retirement plans page (opens in a new tab)IRS Notice 2025-67 (opens in a new tab)| Rule | SIMPLE IRA | SEP IRA | 401(k) | Defined benefit plan | Taxable account | Source |
|---|---|---|---|---|---|---|
| Who puts money in | Employees may defer pay. The employer must contribute each year. | The employer only. | Employees may defer pay. The employer may add more. | Generally the employer. | You, with money that was already taxed. | IRS, SIMPLE IRA plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab)IRS, 401(k) plans page (opens in a new tab)Internal Revenue Service, Defined benefit plan page (opens in a new tab) |
| The employee’s own deferral, 2026 | $17,000, the limit that generally applies to SIMPLE retirement accounts and SIMPLE 401(k) plans. | None. A SEP takes no employee deferrals. | $24,500. A catch-up of $8,000 generally applies for individuals aged 50 or over, and a catch-up of $11,250 applies for individuals who attain age 60, 61, 62, or 63 in 2026. | Generally none. | No limit. | IRS Notice 2025-67 (opens in a new tab)IRS, SEP plan page (opens in a new tab) |
| What the 2026 dollar limit caps | The deferral, plus the employer’s required contribution set by formula. | The employer’s contribution for each employee: the lesser of 25 percent of the employee’s compensation or $72,000. | Total additions to each account: $72,000, not counting catch-up contributions. | The annual benefit: $290,000, or 100 percent of average pay for the highest 3 years if lower. No dollar limit on the contribution. | Nothing. No limit applies. | IRS Notice 2025-67 (opens in a new tab)26 U.S.C. 415(b)(1)(B) (opens in a new tab)IRS, SIMPLE IRA plan page (opens in a new tab)26 U.S.C. 402(h)(2) (opens in a new tab)IRS, One-participant 401(k) plans page (opens in a new tab) |
| Pay the plan may count, 2026 | $360,000 for the employer’s contribution to every eligible employee. The match is not limited by it. | $360,000 | $360,000 | $360,000 | Does not apply. | IRS Notice 2025-67 (opens in a new tab)IRS, SIMPLE IRA plan page (opens in a new tab) |
| Is a contribution required every year? | Yes, the employer’s contribution. | No. In a year the employer contributes, every eligible employee gets the same rate. | The plan document decides. The federal minimum funding rules do not apply. | Yes. The minimum is due eight and a half months after the plan year ends. | No. | IRS, SIMPLE IRA plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab)26 U.S.C. 412(e)(2)(A) (opens in a new tab)26 U.S.C. 430(j)(1) (opens in a new tab) |
| Can it run beside a defined benefit plan? | No. The employer cannot have any other retirement plan. | Not on Form 5305-SEP, the IRS model document. | Yes. | The employer can have other retirement plans. | Yes. The account is separate from any plan. | IRS, SIMPLE IRA plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab)Internal Revenue Service, Defined benefit plan page (opens in a new tab) |
| Yearly filing for the employer | Generally none. | Generally none, including Form 5500. | A Form 5500 series return, with an exemption for some small one-participant plans. | Form 5500 with Schedule SB, signed by an enrolled actuary. | None. | IRS, SIMPLE IRA plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab)IRS, One-participant 401(k) plans page (opens in a new tab)Internal Revenue Service, Defined benefit plan page (opens in a new tab) |
| Who carries the investment risk | Each employee, in his or her own IRA. | Each employee, in his or her own IRA. | Each employee, in his or her own account. | The employer. Benefits do not depend on asset returns. | You. | IRS, SEP plan page (opens in a new tab)26 U.S.C. 414(i) and (j) (opens in a new tab)Internal Revenue Service, Defined benefit plan page (opens in a new tab) |
| Tax on money going in | Deductible for the business within its limits. | Deductible for the business within its limits. | Deductible for the business within its limits. | Deductible for the business within the limit an actuary figures. | No deduction. | Internal Revenue Service, Publication 560 (opens in a new tab) |
| Tax on money coming out | Taxed as income. A withdrawal before age 59½ generally carries a 25 percent additional tax during the first 2 years after you first join the employer’s SIMPLE plan, then 10 percent. | Taxed as income. A withdrawal before age 59½ generally carries a 10 percent additional tax. | Taxed as income, except a qualified payment from a Roth account. A payment before age 59½ carries a 10 percent additional tax unless an exception applies. | Taxed as income. A payment before age 59½ carries a 10 percent additional tax unless an exception applies. | Interest and dividends are taxed in the year paid, and gains in the year you sell. The money you put in was already taxed. | 26 U.S.C. 402(a) (opens in a new tab)26 U.S.C. 72(t)(1) (opens in a new tab)26 U.S.C. 72(t)(6) (opens in a new tab)IRS, SIMPLE IRA plan page (opens in a new tab)26 U.S.C. 61(a) (opens in a new tab) |
What is the best retirement plan for a high-income small business owner?
No single plan is best for every owner, because each plan caps something different. The 2026 limits stop a 401(k) at $72,000 of total additions, not counting catch-up contributions. A defined benefit plan caps the yearly benefit instead, so an older owner, with fewer years left to fund the same capped benefit, can contribute more.
Which design fits depends on the owner’s age, pay, staff and the deduction wanted, and the actuary’s proposal shows the result for each. A defined benefit plan can run beside a 401(k), so the choice need not be one plan or the other.
IRS Notice 2025-67 (opens in a new tab)Internal Revenue Service, Publication 560 (opens in a new tab)Should I just invest in a taxable brokerage account instead?
The two follow different tax rules. A pension contribution is deducted now, its earnings are not taxed while they stay in the plan, and every dollar paid out is taxed as ordinary income. A taxable account gives no deduction, and its interest, dividends and gains are taxed as they arise, but the money stays yours to use at any time.
The plan also brings a contribution the business must make each year, fees for the actuary and the administrator, and an additional tax on early payouts. Which path leaves you with more depends on your tax rate now, your rate when the money comes out and how long it stays in. Your CPA can run both.
Internal Revenue Service, Publication 560 (opens in a new tab)26 U.S.C. 402(a); 26 U.S.C. 72(t)(1) (opens in a new tab)26 U.S.C. 61(a) (opens in a new tab)Which plans can run beside a defined benefit plan?
A 401(k) can, and so can a SEP on a prototype or individually designed document. A SIMPLE IRA cannot, because the IRS says an employer with a SIMPLE IRA plan cannot have any other retirement plan. Form 5305-SEP, the IRS model SEP document, cannot be used while the employer keeps any other qualified plan.
When a 401(k) or a SEP covers the same people as a defined benefit plan, section 404(a)(7) of the tax code can cap the combined deduction at the greater of 25 percent of covered pay or the defined benefit minimum. The rule has exceptions that matter for a small plan, and the page on keeping a 401(k) sets them out.
IRS, SIMPLE IRA plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab)26 U.S.C. 404(a)(7)(A); 26 U.S.C. 404(h)(3) (opens in a new tab)What does a defined benefit plan ask of an owner that the other plans do not?
The IRS lists the defined benefit plan as the most costly type of plan and the most administratively complex one. The contribution is mandatory each year within the range the enrolled actuary certifies, and an unpaid minimum is taxed at 10 percent, then 100 percent if the amount stays unpaid.
The employer bears the investment risk. Benefits do not depend on asset returns, so a shortfall raises future contributions. The money stays in the plan until age 59½, separation from service or the end of the plan, and a distribution before 59½ carries a 10 percent additional tax unless an exception applies. Staff must be covered and credited under federal tests. Fees for the actuary, the administrator and the filings are paid every year.
Internal Revenue Service, Defined benefit plan page (opens in a new tab)26 U.S.C. 4971(a)(1); 26 U.S.C. 4971(b); 26 U.S.C. 72(t)(1) (opens in a new tab)Checked on October 15, 2026.