Defined benefit plan or SEP IRA?
The limitation for defined contribution plans under section 415(c)(1)(A) is increased in 2026 from $70,000 to $72,000.
The 2026 dollar side of the SEP limit for each employee, beside the 25 percent of pay limit in 26 U.S.C. 402(h)(2). A defined benefit plan is not limited by it. Read IRS Notice 2025-67 in full (opens in a new tab)
A SEP IRA takes the contributions an employer chooses to make each year, up to a limit for each employee, while a defined benefit plan promises a yearly benefit and an enrolled actuary sets a contribution the employer must pay every year.
What is the difference between a defined benefit plan and a SEP IRA?
A SEP IRA lets an employer put money into a traditional IRA for each eligible employee, at one uniform rate for everyone, in the years the employer chooses to contribute. A defined benefit plan promises a yearly benefit, capped at $290,000 for 2026, and an enrolled actuary sets a contribution the employer must pay every year.
IRS, SEP plan page (opens in a new tab)IRS Notice 2025-67 (opens in a new tab)| Rule | Defined benefit plan | SEP IRA | Source |
|---|---|---|---|
| Who puts money in | Generally the employer. The employer makes most contributions. | The employer only. A SEP takes no employee deferrals. | Internal Revenue Service, Defined benefit plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab) |
| Pay the plan may count, 2026 | $360,000 | $360,000 | IRS Notice 2025-67 (opens in a new tab) |
| Which employees are in | The plan must pass federal participation and coverage tests on the employer’s census. | Every eligible employee. For 2026, the SEP rules use $800 of pay as the threshold, together with age and service conditions. | 26 U.S.C. 401(a)(26) (opens in a new tab)IRS Notice 2025-67 (opens in a new tab)IRS, SEP plan page (opens in a new tab) |
| Is a contribution required every year? | Yes. The minimum is due eight and a half months after the plan year ends, and an unpaid minimum is taxed at 10 percent. | No. In a year the employer contributes, it contributes for every eligible employee at the same rate. | 26 U.S.C. 430(j)(1) (opens in a new tab)26 U.S.C. 4971(a)(1) (opens in a new tab)IRS, SEP plan page (opens in a new tab) |
| Who carries the investment risk | The employer. Benefits do not depend on asset returns. | Each employee, who makes the investment decisions for his or her own SEP-IRA. | Internal Revenue Service, Defined benefit plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab) |
| Vesting | Cash balance plan: fully vested after 3 years of service. Traditional plan: fully vested after 5 years, or 20 percent after 3 years rising to 100 percent after 7. | Always fully vested. Each employee owns every dollar in the SEP-IRA. | 26 U.S.C. 411(a)(13)(B); 26 U.S.C. 411(a)(2)(A)(ii); 26 U.S.C. 411(a)(2)(A)(iii) (opens in a new tab)IRS, SEP plan page (opens in a new tab) |
| Yearly filing | Form 5500 with Schedule SB, signed by an enrolled actuary. | Generally none, including Form 5500. | Internal Revenue Service, Defined benefit plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab) |
| Running beside another plan | The employer can have other retirement plans. | Not on Form 5305-SEP, the IRS model document, if the employer keeps any other qualified plan. | Internal Revenue Service, Defined benefit plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab) |
| Taking money out | The plan generally pays nothing to a working participant before age 59½. A payment is taxed as income, and one before 59½ carries a 10 percent additional tax unless an exception applies. | Withdrawals are allowed at any time. Each one is taxed as income, and one before age 59½ generally carries a 10 percent additional tax. | Internal Revenue Service, Defined benefit plan page (opens in a new tab)IRS, SEP plan page (opens in a new tab)26 U.S.C. 72(t)(1) (opens in a new tab) |
If I have a SEP IRA, can I still have a cash balance plan?
Yes, but not on the IRS model form. An employer may not use Form 5305-SEP, the IRS’s model SEP document, while it keeps any other qualified plan, and a plan counts as kept even in a year with no contributions. A SEP that runs beside a pension needs a prototype or an individually designed document.
A cash balance plan is a defined benefit plan, so the same rule applies to every pension on this site. An owner can also pair the pension with a 401(k) in place of the SEP. Unlike a SEP, a 401(k) carries the employee’s own deferral, $24,500 for 2026.
IRS, SEP plan page (opens in a new tab)IRS Notice 2025-67 (opens in a new tab)How does a SEP count when a defined benefit plan runs beside it?
For the combined deduction limit, the tax code treats a SEP as if it were a separate profit-sharing plan. When the SEP and the defined benefit plan cover the same people, section 404(a)(7) caps the combined deduction at the greater of 25 percent of covered pay or the defined benefit minimum.
Employer contributions to defined contribution plans of up to 6 percent of pay are left out of that cap. The cap does not apply to a defined benefit plan the PBGC covers. The PBGC, the federal pension insurer, does not cover a professional practice’s plan that has never had more than 25 active participants at any time after September 2, 1974, or a plan kept only for substantial owners.
26 U.S.C. 404(h)(3) (opens in a new tab)26 U.S.C. 404(a)(7)(A); 26 U.S.C. 404(a)(7)(C)(iii); 26 U.S.C. 404(a)(7)(C)(iv) (opens in a new tab)29 U.S.C. 1321(b)(13) (ERISA 4021(b)(13)); 29 U.S.C. 1321(b)(9) and (d) (opens in a new tab)What does a defined benefit plan ask of an owner that a SEP IRA does 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.