10 Retirement Plan Mistakes Business Owners Make (and CPAs Have to Fix)

1. The SEP IRA Over-Contribution

A self-employed consultant has a strong year. Net profit looks like $200,000, so she tells her custodian to contribute the SEP maximum and deposits what she believes is 25% of her income.

Except a self-employed person does not contribute 25% of net profit. The SEP contribution for an owner is based on net earnings from self-employment, which is net profit reduced by the deductible half of self-employment tax and then reduced again by the SEP contribution itself. That circular calculation produces an effective rate closer to 20% of net profit, not 25%. The consultant who deposited a flat 25% just made an excess contribution.

The excess is not deductible, it can trigger a 10% excise tax on the employer, and if it sits in the account it compounds the problem year over year. The usual correction path is to remove the excess, adjusted for earnings, from the affected SEP IRA and return it to the employer. If the excess remains in the IRA, the issue can split into participant-level IRA excise tax exposure and employer-level nondeductible contribution consequences.

2. The Solo 401(k) Excess Deferral After April 15

A business owner contributes to a Solo 401(k) at his own company and also defers into a 401(k) at a part-time W-2 job. He treats each plan as having its own limit.

The 402(g) elective deferral limit is an individual limit, not a per-plan limit. Deferrals across every plan in a single year are aggregated against one annual ceiling. When the combined total exceeds the limit, the excess has to come out, and the deadline is brutal: the corrective distribution must be completed by April 15 of the following year. Filing a tax extension does not extend it. April 15 is a statutory wall.

Miss that wall and the excess is taxed twice. Once in the year it was contributed, and again when it is eventually distributed, with no basis credit to offset the second hit. There is no clean fix after the deadline, only damage control.

3. The Solo 401(k) 415(c) Overage

A profitable S-corp owner maxes her elective deferral, then has her business make a generous profit-sharing contribution on top of it. Each piece looks fine in isolation.

The problem is the ceiling that sits above both of them. Section 415(c) caps total annual additions to the plan, which means elective deferrals, employer profit-sharing, and any other contributions all count against one combined limit. An owner who maxes the deferral and then funds a large profit-sharing contribution can blow past 415(c) without ever exceeding any single sub-limit.

A 415(c) excess is a qualified plan correction, not an IRA-style withdrawal. The correction follows an ordering rule: unmatched elective deferrals come out first, then matched deferrals with the related match forfeited, then employer profit-sharing is forfeited until the total is back under the limit. The exact mechanics depend on the plan document and recordkeeper procedures. It is plan-document work, and getting the order wrong creates a new problem.

4. The SIMPLE IRA Two-Year Rule

An employee leaves a job where she participated in a SIMPLE IRA and rolls the balance into a traditional IRA at a new custodian. The rollover looks routine. The penalty does not show up until she files.

During the first two years of SIMPLE IRA participation, money generally can move tax-free only to another SIMPLE IRA. A move to a non-SIMPLE IRA or plan during that window is treated as a distribution, and if the taxable amount is subject to the early-distribution tax, the rate is 25% instead of the usual 10%. The two-year clock starts on the first day the employer deposits a contribution in the SIMPLE IRA, not the hire date and not the account-opening date. The receiving custodian has no way to verify when that first contribution was made, so the rollover is accepted and the statement looks clean. The penalty surfaces at tax time.

The 25% rate is punitive by design. Congress wanted to discourage early movement out of SIMPLE plans, and the elevated penalty is the enforcement mechanism. For a business owner advising departing employees, or for the employee's CPA, knowing the two-year date is the only protection.

5. Choosing the Wrong Plan

A business owner with three employees and strong cash flow sets up a SIMPLE IRA because it was the easiest plan to open. Two years later the business is more profitable and the owner wants to put away far more than the SIMPLE limit allows. Now the plan itself is the constraint.

Plan selection is the mistake that causes other mistakes. A SIMPLE IRA caps contributions well below a SEP or a Solo 401(k). A SEP requires the owner to contribute the same percentage for eligible employees as for themselves, which gets expensive as staff grows. A Solo 401(k) only stays simple while it covers only the owner, or the owner and spouse. A cash balance plan can absorb very large contributions but carries actuarial cost and commitment. The right plan depends on the number of employees, the cash flow stability, the owner's age, and how much the owner actually wants to contribute.

Switching plans later is not free. SIMPLE IRAs in particular have mid-year termination restrictions. Choosing correctly the first time is far cheaper than restructuring.

6. The Cash Balance Contribution Timing Trap

A business owner adopts a cash balance plan to make a large deductible contribution. The actuary sets the funding target. The contribution is wired in October, after the S-corp return was filed on extension, and the owner assumes the deduction lands in the right year.

Cash balance plans run on actuarial funding rules and firm deadlines. The required contribution is determined by an actuary, and the minimum funding deadline is generally eight and a half months after the plan year ends. Funding after the business return has already been filed can create deduction-reporting problems, amended-return work, or a mismatch between the plan's funding requirement and the tax return. It does not always mean the contribution is lost, but it does mean the actuary, CPA, and plan administrator need to reconcile the funding deadline and the deduction year. The contribution also has to fit within the deduction rules when a cash balance plan is paired with a 401(k), because the combined-plan deduction limits interact.

Cash balance timing is less forgiving than any IRA-based plan. The actuary, the funding deadline, and the business return all have to be coordinated, and the owner usually is not the one tracking that.

7. Missed Plan-Establishment Deadlines

A business owner decides in March, while preparing the prior-year return, that a retirement plan would have cut the tax bill. Whether that is still possible depends entirely on which plan, and most owners assume one deadline covers all of them. It does not.

A SEP IRA is the most forgiving. It can be established and funded as late as the business tax filing deadline, including extensions. A Solo 401(k) establishment deadline depends on the business structure and the contribution type. Employer contributions may often be made after year-end, up to the business filing deadline including extensions, if the plan was timely established. Employee deferrals are more sensitive. Sole proprietors may have retroactive deferral options under newer rules, while incorporated owners generally need the deferral election and payroll mechanics handled during the plan year. A SIMPLE IRA is the strictest: it must be established by October 1 of the year it is effective, with a narrow exception for brand-new businesses started after October 1.

The mistake is treating these deadlines as one. An owner who waits until March can often still open and fund a SEP for the prior year, and sometimes make a Solo 401(k) employer contribution, but never establish a SIMPLE IRA for a year that already closed.

8. Late SIMPLE IRA Contributions and Deferral Deposits

A small business runs payroll, withholds employee SIMPLE IRA deferrals, and deposits them to the custodian whenever the bookkeeper gets to it. The employer match is calculated at year-end and funded sometime before the return is filed. Both timelines feel reasonable. Both can be wrong.

Two separate failures hide here. The first is the employer contribution: the required match or nonelective contribution has its own funding deadline tied to the business return, and missing it is a plan failure that may require a corrective contribution with earnings. The second is more serious. Employee elective deferrals withheld from a paycheck must be deposited as soon as they can reasonably be segregated from the employer's general assets. For small plans there is a seven-business-day safe harbor. The IRS SIMPLE IRA rule also uses a 30-day-after-month-end outer deadline, but the DOL rule can be stricter, because employee deferrals become plan assets once they can reasonably be segregated. Deposits later than the applicable deadline are a prohibited transaction, which can require lost-earnings calculations and a Form 5330 excise tax.

A business owner rarely thinks of a late payroll deposit as a fiduciary breach. The Department of Labor does. The CPA who finds it has two different corrections to run, not one.

9. The Commingled SEP and the Lost Basis Trail

A SEP IRA is structurally a traditional IRA that an employer funds. Because of that, most SEP plan documents do not prevent the owner from also making a regular personal traditional IRA contribution into the same account. Many owners do exactly that, and that is where the basis trail goes cold.

The personal contribution is subject to all the normal traditional IRA rules, including the deductibility phase-out. If the owner is an active participant in the SEP, the personal contribution may be partly or fully non-deductible. A non-deductible contribution creates basis, and basis only counts if it is tracked on Form 8606. When the personal contribution is commingled with employer SEP money in one account and nobody files the 8606, the after-tax dollars lose their identity.

Years later the distributions get taxed in full. The owner pays tax again on money that was already taxed once, because the IRS has no record that any of the account was after-tax. The failure-to-file penalty for Form 8606 is small. The cost of the missing basis can run for decades.

10. SEP and SIMPLE Coverage Failures

An owner sets up a SEP primarily to fund their own retirement. There is a part-time office manager who has been around for years, and a seasonal worker who comes back every busy season. The owner contributes for themselves and assumes the others do not count. Often they do.

SEP and SIMPLE plans have eligibility rules that are easy to underestimate. A SEP generally must cover any employee who is at least 21, has worked for the business in three of the last five years, and earned at least a low dollar threshold in the current year. Three of the last five years includes part-time years. A SIMPLE IRA generally must cover any employee who earned at least $5,000 in any two prior years and is reasonably expected to earn $5,000 in the current year.

Excluding an eligible employee is a plan compliance failure, and the correction usually requires putting the employee in the position they would have been in if they had been included. That generally means a make-up contribution for the excluded employee, adjusted for the earnings they would have had. Caught years later, across multiple employees, it gets expensive fast. The owner thought the plan was just for them. The plan document and the IRS think otherwise.

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