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401(k) Plans for Business Owners

Qualified employer-sponsored retirement plans allowing pre-tax or Roth contributions up to $23,500 per year (2025), with additional employer profit-sharing contributions and catch-up provisions for those over 50.

Vehicle Source: generalized Verified: 2026-04-07

What Is a 401(k) Plan for Business Owners?

A 401(k) plan is a qualified employer-sponsored retirement plan governed by IRC Section 401(a) and ERISA that allows employees, including business owners, to defer compensation on a pre-tax or Roth basis. Under IRC Section 401(k), employees may defer up to $23,500 per year (2025), with an additional $7,500 catch-up contribution under IRC Section 414(v) for participants aged 50 and older.

Employers may add profit-sharing contributions up to the lesser of 25% of compensation or the overall annual addition limit. The combined employee-plus-employer cap reaches $70,000 per participant for 2025, or $77,500 with catch-up contributions. These figures are adjusted annually by the IRS for inflation.

How Does a 401(k) Plan Work for Business Owners?

Business owners occupy both the employee and employer roles, which creates the opportunity to contribute on both sides of the equation.

Employee deferrals of up to $23,500 (2025) reduce current taxable income dollar-for-dollar. Under IRC Section 402A, Roth 401(k) deferrals use after-tax dollars but produce tax-free qualified distributions in retirement, provided the account has been open for at least five years and the participant is 59-1/2 or older.

Employer profit-sharing contributions are deductible by the business under IRC Section 404 and do not count against the employee deferral limit. The business deducts these contributions as an ordinary expense, reducing taxable income at the entity level.

A Solo 401(k), also called an Individual 401(k), is designed for self-employed individuals or business owners with no full-time employees other than a spouse. Solo 401(k) plans offer the same contribution limits with simplified administration and lower annual compliance costs.

Solo 401(k) plans also accept Roth contributions and allow participant loans of up to $50,000 or 50% of the vested balance. These features are not available in SEP IRAs. However, adding employees to a solo 401(k) triggers additional nondiscrimination testing requirements under IRC Section 401(a)(4), which increases administrative complexity.

When Do Entrepreneurs Use 401(k) Plans?

All business owners use the 401(k) as the baseline retirement deferral vehicle in the DEAPR toolkit. The plan satisfies the "D" (Defer) component by sheltering income from current taxation.

Solo entrepreneurs benefit from the solo 401(k) structure, which maximizes deferral with minimal cost. Annual filing of IRS Form 5500-EZ is required only when plan assets exceed $250,000.

Layered retirement strategies combine 401(k) profit-sharing with a Cash Balance Plan to produce the highest possible tax deferral. Under IRC Section 412, Cash Balance Plan contributions are mandatory once the plan is adopted, so business cash flow stability is a prerequisite.

Roth 401(k) strategies allow high-income owners who exceed the Roth IRA income limits ($161,000 single / $240,000 married filing jointly for 2025 under IRC Section 408A) to make after-tax retirement contributions through the Roth 401(k) option. SECURE 2.0 Act (2022) eliminated required minimum distributions for Roth 401(k) balances starting in 2024, improving the long-term compounding value of Roth 401(k) deferrals.

How Does Dew Wealth Approach 401(k) Planning?

The 401(k) is one ingredient in a diversified tax deferral strategy, not the entire recipe. Dew Wealth recognizes that 401(k) plans provide strong creditor protection under ERISA (unlimited federal bankruptcy protection for qualified plan assets) while creating tax-diversified retirement buckets.

Combining pre-tax deferrals with Roth 401(k) contributions builds both taxable and tax-free withdrawal options in retirement. The Fractional Family Office^® evaluates annually whether the marginal tax rate favors pre-tax or Roth contributions, factoring in expected future rates, state residency plans, and other DEAPR components.

However, 401(k) plans carry limitations. Nondiscrimination testing under IRC Sections 401(a)(4) and 410(b) may restrict the owner's contribution if rank-and-file employees do not participate at sufficient levels. Early withdrawals before age 59-1/2 incur a 10% penalty under IRC Section 72(t) in addition to ordinary income tax, reducing liquidity. Business owners should weigh these restrictions against the tax deferral benefits.

Frequently Asked Questions

Should I contribute pre-tax or Roth?

The decision depends on current and expected future tax rates. Pre-tax contributions provide an immediate deduction at the top federal rate of 37% (2025). Roth contributions provide tax-free withdrawals in retirement, provided the five-year rule and age requirements are met. Many entrepreneurs benefit from splitting contributions between both options based on annual tax projections.

Can I set up a 401(k) late in the year?

The plan must be established by December 31 of the tax year to permit employee deferrals for that year. Employer profit-sharing contributions, however, can be determined and funded until the business tax filing deadline, including extensions. Safe harbor 401(k) plans require establishment by October 1 of the plan year, unless the employer adopts only the 3% nonelective safe harbor provision under IRS Notice 2018-95.

What happens if I add employees later?

Adding eligible employees to a solo 401(k) triggers nondiscrimination testing, top-heavy rules under IRC Section 416, and potential mandatory employer contributions. The [Fractional Family Office®](/wiki/fractional-family-office) coordinates with the third-party administrator to restructure the plan before the staffing change takes effect.

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