Retirement Plans for Architecture Firm Partners: SEP, Solo 401(k), Defined Benefit, and Staff Plans

An architecture firm partner earning $400,000 in K-1 income pays roughly $50,000 in self-employment tax (or its equivalent in payroll tax for S-Corp shareholders) and $80,000-$100,000 in income tax. A well-designed retirement plan can reduce the income tax by $15,000-$50,000 per year while building a tax-deferred retirement account. The challenge is choosing the right plan type for the firm’s specific situation: a sole practitioner with no employees has different options than a 30-person firm with 15 staff members who must be covered.

How do retirement plan contributions work for partners?

A partner’s retirement plan contribution is based on net self-employment income, which is the partner’s share of the firm’s ordinary business income (K-1, Box 14, Code A) reduced by 50% of the self-employment tax. This is the “earned income” for retirement plan purposes.

For an S-Corp shareholder-employee, the contribution base is W-2 wages, not the S-Corp distribution. This distinction matters because the S-Corp owner controls the salary level (within the bounds of “reasonable compensation”), and a higher salary increases the retirement plan contribution limit while also increasing payroll tax.

The interplay between salary, payroll tax, and retirement contribution requires balancing: setting the salary high enough to maximize the retirement contribution, but not so high that the payroll tax cost exceeds the income tax savings from the retirement deduction.

Solo 401(k) vs SEP for a sole practitioner?

A sole practitioner with no full-time employees can choose between a SEP IRA and a Solo 401(k). The Solo 401(k) is almost always the better choice at lower income levels because of the employee deferral component.

The Solo 401(k) also offers a Roth deferral option (the employee deferral can be designated as Roth, meaning no current deduction but tax-free withdrawals in retirement). The SEP does not offer Roth contributions.

The Solo 401(k) has a higher administrative burden: a plan document is required (not just the one-page Form 5305-SEP), and Form 5500-EZ must be filed annually when plan assets exceed $250,000. The Solo 401(k) must be established by December 31 of the plan year; the SEP can be established up to the filing deadline (including extensions).

When does a defined benefit plan suit an architect?

A defined benefit (DB) plan promises a specific annual benefit at retirement, and the annual contribution is the amount needed to fund that benefit. For an older architect with high income, the DB plan allows contributions far exceeding the $72,000 combined limit of a 401(k).

A 58-year-old architect earning $500,000 with seven years to retirement at age 65 can contribute $150,000-$250,000 per year to a DB plan, depending on actuarial assumptions. At a 37% marginal rate, a $200,000 contribution saves $74,000 in income tax. For firm owners approaching retirement, the defined benefit plan is often part of a broader succession and ownership transition strategy that includes the sale or transfer of the practice.

The catch: the DB plan requires consistent annual funding. If the firm has a bad year, the contribution is still mandatory. This makes the DB plan appropriate only for architects with stable, high income. A common approach is to layer a DB plan on top of a 401(k): the 401(k) provides the base contribution with full flexibility, and the DB plan provides the additional deduction in high-income years. If income drops, the DB plan can be frozen or terminated (with some administrative cost).

What about firms with staff?

Architecture firms with employees must cover eligible employees in the retirement plan. This changes the cost-benefit analysis:

Safe Harbor 401(k): The employer makes either a 3% nonelective contribution (to all eligible employees, whether or not they contribute) or a 4% match (dollar-for-dollar up to 3%, then 50 cents on the dollar up to 5% of compensation). The Safe Harbor contribution eliminates ADP/ACP nondiscrimination testing, which would otherwise limit the partners’ contributions if employees do not contribute enough.

For a 15-person firm where 10 staff members earn an average of $70,000, the 3% nonelective Safe Harbor contribution costs $21,000 per year (10 x $70,000 x 3%). This is the price of ensuring the partners can maximize their own contributions.

Cross-tested profit sharing: A cross-tested plan divides participants into groups (typically by age or position) and tests the contribution as an equivalent annual benefit rather than a contribution percentage. This allows the firm to contribute a higher percentage for older, higher-paid partners while providing a lower percentage for younger staff, as long as the plan passes the “general test” for nondiscrimination. A typical cross-tested plan might contribute 20% of compensation for partners over 50 and 5% for staff under 40.

SIMPLE IRA: Available for firms with 100 or fewer employees. The employer matches dollar-for-dollar up to 3% (or makes a 2% nonelective contribution). The employee deferral limit is lower than a 401(k): $16,500 for 2025 ($17,600 for 2026). The SIMPLE IRA is less expensive to administer than a 401(k) but caps the partners’ contributions at a lower level.

How does SECURE 2.0 affect architecture firm plans?

SECURE 2.0 introduced several provisions relevant to A/E firms:

Auto-enrollment mandate (effective 2025): New 401(k) and 403(b) plans established after December 29, 2022 must automatically enroll eligible employees at a deferral rate of 3-10% (escalating by 1% per year to 10-15%). Existing plans are exempt. Small businesses (10 or fewer employees) and firms less than 3 years old are also exempt.

Super catch-up at ages 60-63: Participants ages 60-63 can defer up to $11,250 (2025, indexed) instead of the standard $7,500 catch-up. This benefits senior partners approaching retirement.

Enhanced tax credits for small plan startup costs: Firms with 50 or fewer employees can claim a tax credit for plan startup costs of up to $5,000 per year for three years, plus an additional credit of up to $1,000 per employee for employer contributions. This significantly reduces the net cost of establishing a new plan.

Starter 401(k): A simplified plan that requires no employer contribution and no nondiscrimination testing. Employee deferrals are limited to $6,000 (2025, indexed). This is useful for firms that want to offer a plan to employees without the cost of Safe Harbor or match contributions, but the low deferral limit makes it unsuitable as the primary plan for high-earning partners.

Related guides:

• Architecture Firm Entity Structure Llc Scorp
• Architecture Firm Multistate Nexus Licensing
• Architecture Firm Professional Liability Insurance Tax
• Architecture Firm Project Accounting Revenue Recognition
• Architecture Firm Succession Ownership Transition

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.