The Pre-Tax Retirement Perks Most Founders Miss Out On
How 2025’s higher limits turn yesterday’s niche pensions into six- and seven-figure tax shelters
A Breakfast Conversation You Don’t Want With Your Future Self
Picture yourself five years from now, sitting in a sun-splashed kitchen after you’ve finally sold the company. Your spouse slides a steaming mug across the table and asks, almost casually, “Why did we pay all those extra taxes when there were legal ways to avoid them?” Your stomach drops because you remember the moment—right now—when you could have moved hundreds of thousands of dollars out of the IRS’s reach but settled for the same vanilla 401(k) you’ve had since your first seed round.
That alternative timeline is avoidable. The Internal Revenue Service has quietly raised the ceilings on every meaningful qualified-plan bucket for 2025. Elective 401(k) deferrals rise to $23,500; total defined-contribution funding tops out at $70,000; and a brand-new “super catch-up” gives founders aged 60-63 another $11,250 of room. Meanwhile, the defined-benefit annuity cap climbs to $280,000, and the compensation you’re allowed to count in pension math reaches $350,000. (IRS)
The only real question left is whether you’ll use those rules—or let them expire while you keep wiring 40-plus cents of every extra dollar to Washington and your state revenue office.
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2025’s Quiet—but Profound—Rule Changes
If you skimmed last November’s COLA notice, you probably caught the headline numbers but missed their ripple effect. With the defined-contribution limit now $70,000 and the defined-benefit ceiling nearly three times higher, the IRS has—inadvertently—given high-margin founders the green light to build multi-plan architectures that were impractical a decade ago. Secure 2.0 layers on its twists: Roth-only catch-ups once your prior-year FICA wages exceed $145k and the new four-year “super catch-up” that lets near-retirees shovel even more pre-tax cash into shelter. (IRS)
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Why a Plain-Vanilla 401(k) Can’t Keep Up
At first glance, the 401(k) looks generous. Twenty-three and a quarter of elective deferrals plus employer profit-sharing until you hit $70,000 feels like real money…until you stack it against modern founder income. Let’s run the math on a not-so-crazy 2025 scenario:
W-2 salary: $350,000 (set high enough to maximize plan calculations)
Pass-through profit: $1,150,000 (your K-1 after the latest funding round)
State + federal marginal rate: 46 % (37 % federal, 3.8 % NIIT, 5.2 % blended state)
Even if you max the plan—employee deferral, catch-up, profit-share—you shelter $70,000 and still pay ordinary income tax on $1.43 million. The IRS and state treasurer pocket roughly $660,000 of it. That’s enough to fund a mid-six-figure seed check into the next company—or to pay this year’s tuition at Stanford…four times.
Worse, the 401(k) cap is both flat and age-agnostic. A 28-year-old designer and a 63-year-old founder get the same $70k ceiling, even though the older founder has far fewer years for compound growth. The plan is democratic, but democracy is expensive when your financial life is not average.
One more kicker: your company’s equity story often forces wages down to keep payroll tax low and 199A deductions alive, which can squeeze the profit-sharing formula even further. By the time you reconcile cash flow, vesting cliffs, and SAFE conversions, the 401(k) has become a side dish—tasty, but nowhere near a full meal.
What you need is a bucket whose contribution limit moves with your age and salary, not one that stops at $70k no matter how high your marginal rate climbs. That leads us straight to cash-balance and 412(e)(3) plans.
Cash-Balance Plans: The “Ghost Pension” That Scales With Age
A cash-balance plan looks like a 401(k) on your dashboard but is regulated like a defined-benefit pension. Because required contributions are age-weighted, the older you are, the bigger the deductible funding target an actuary will certify.
¹Includes regular or higher catch-ups as applicable.
²Based on first-year funding at $350 k comp; see actuarial grid.
Source: IRS COLA table & TRA actuarial chart.
Why founders love it
Front-loaded deductions. Compress 15 years of savings into the last five before exit.
No investment risk drag. You credit a “hypothetical” 4-5 %—actual portfolio returns (or losses) are absorbed at the plan level.
Owner-heavy demographics are workable. Over 60 % of today’s cash-balance plans serve companies with ≤ 9 employees, so don’t let a tiny team scare you.
The Fully-Insured 412(e)(3) — When You Need a Tax Nuke, Not a Firecracker
Think of a fully insured 412(e)(3) plan as the heavyweight cousin of cash-balance. Because fixed annuities or whole-life policies guarantee every benefit, actuaries must price contributions using very conservative assumptions—translation: huge deductions.
Example – 55-year-old S-corp owner, $350k salary, retires at 62
Needed 401(k) + PS contribution: $70,000
412(e)(3) annuity-only contribution: $324,641
412(e)(3) annuity + life (adds death-benefit leverage): $452,990
That’s a potential $450 k above-the-line write-off—enough to wipe out federal tax entirely for many practice owners or solo GPs. Caveats:
Funding is inflexible. Miss a premium, and the guarantee evaporates.
Insurance costs drag long-term ROI. This is an income-shelter tool, not an alpha engine.
PBGC exempt only if ≤ 25 participants. Watch the headcount.
Stacking Strategies—Why the Old “Combined Plan” Cap No Longer Applies
Older founders sometimes flinch when an adviser proposes running both a 401(k)/profit-sharing arrangement and a defined-benefit layer inside the same corporation; they still remember §415(e), the pre-2000 rule that forced two plans to share one stingy limit. Congress repealed that cap long ago, and modern law lets each plan live under its own far-bigger umbrella. (IRS)
Let’s see what that freedom looks like in hard dollars. Imagine a Delaware C-corp SaaS outfit with two co-founders, ages 52 and 47, plus four W-2 engineers:
Step 1: 401(k) – Each founder defers $23,500; the 52-year-old tacks on a $7,500 catch-up; employer profit-sharing fills the bucket to $70,000.
Step 2: Cash-balance layer – Age-weighted funding adds $265,000 for the older founder and $190,000 for the younger.
Step 3: 412(e)(3) side-car – The 52-year-old wants a one-time deduction before a Series B recap and drops another $310,000 into a fully insured plan.
Total deductible outflow: $645,000 this year—more than nine times the plain 401(k) max—while rank-and-file staff still get an affordable 8 % of pay. The only remaining guardrails are the generous §404 deduction limit and routine nondiscrimination tests, both of which a decent actuary can handle. In plain English: the Treasury is subsidizing your retirement instead of reverse-engineering equity out of your cap table.
Implementation—Five Missteps That Blow Up Deductions
Coverage testing is the silent killer. A cash-balance formula that looks immaculate for founders can still fail ratio or average-benefit tests the moment you onboard a single non-owner whose demographics skew the actuarial curve. Fixing the error after the year closes means corrective contributions that are not deductible in the original year—and sometimes excise taxes. Run a pro forma before you sign the plan documents.
Calendar mismatches punish cash flow. If your fiscal year ends June 30 but your pension year ends December 31, required contributions come due exactly when bonuses and vendor pre-pays drain cash. One biotech had to borrow at 12 % bridge rates to cover a December cash-balance deposit that would have been painless if the plan and fiscal calendars matched.
Under-funding triggers real taxes and wrecks loan covenants. Miss the minimum, and the IRS slaps on a 10 % excise tax every year you stay short. Banks also discount enterprise value when they smell pension liability. Funding to 110 % gives you a cushion and shows creditors you’re solvent.
Late Form 5500 filings now carry teeth. Thanks to SECURE Act tweaks, the IRS can hit you for $250 per day, up to $150,000 for each late return. (IRS) Multi-plan sponsors often need separate schedules, and your record-keeper’s auto-file may not cover them. Put a recurring task in whatever software runs your life.
The Roth-only catch-up rule is a trap. Starting with wages earned in 2024, anyone who made more than $145,000 in FICA wages must funnel catch-up contributions into Roth, not pre-tax.(IRS) If payroll misses the flag, the dollars become immediately taxable, and your plan document goes out of compliance. Audit the census in Q1, sync with payroll, and update the adoption agreement before the first deferral hits the trust account.
Navigate these five potholes—coverage, timing, funding, filing, and Roth catch-ups—and the six-figure deductions promised on paper become real-world cash that compounds inside a creditor-protected pension instead of bleeding from your operating account.
Failing to exploit advanced DB architecture in 2025 is the entrepreneurial equivalent of letting your best customer go un-invoiced. Between cash-balance flexibility and 412(e)(3) brute force, most founders with healthy margins can shift an extra six—or even seven—figures from Schedule K-1 into a tax-deferred silo that compounds until you decide to exit.
Call your TPA, actuary, and CPA before Labor Day. Every quarter you delay is another quarter the IRS enjoys profits you already earned.
This material is for educational purposes only and does not constitute tax, legal, or investment advice. Always consult professionals who understand your specific facts and objectives.