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Can a One-Person Small Business Establish a One-Participant 401(k) Plan?

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Can a One-Person Small Business Establish a One-Participant 401(k) Plan?

By nicoj
Published: June 8, 2011 Updated: June 8, 2011
By Dennis Byrne
 
Absolutely, a one-participant 401(k)retirement plan is not new, and for many self-employed small business owners it may be one of the best ways to prepare for future retirement needs.
 
In recent years a one-participant 401(k) plan has been called aSolo-k, a Solo-401(k),a Uni-k, or simply a One-participant k.
 
The one-participant 401(k) plan is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.
 
There are some nuances to be aware of however and the IRS offers these guidelines:
 
Contribution limits in a one-participant 401(k) plan
 
The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:
 
Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit ($16,500 for 2011, or $22,000 if age 50 or over); and employer nonelective contributions up to 25% of compensation as defined by the plan, or for self-employed individuals, see discussion below total contributions to a participant’s account, not counting catch-up contributions, cannot exceed $49,000 (for 2011).
 
Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2011. He deferred $16,500 in regular elective deferrals plus $5,500 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2011 were $34,500. This is the maximum that can be contributed to the plan for Ben for 2011.
 
A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that the limits on elective deferrals are by person, not by plan.
 
Contribution Limits for Self-Employed Individuals
 
You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both: one-half of your self-employment tax, and contributions for yourself.
Use the rate table or worksheets in Chapter 5 of IRS Publication 560, “Retirement Plans for Small Business,” for figuring your allowable contribution rate and tax deduction for your 401(k) plan contributions.
 
Testing in a one-participant 401(k) plan
 
A business owner with no common-law employees does not need to perform nondiscrimination testing for the plan, since there are no employees who could have received disparate benefits.
 
The no-testing advantage vanishes if the employer hires employees. No matter what the 401(k) plan is called by a plan provider, it must meet the rules of the Internal Revenue Code. If employees are hired and they meet the eligibility requirements of the plan and the Code, they must be included in the plan and their elective deferrals will be subject to nondiscrimination testing (unless the 401(k) plan is a safe harbor plan or other plan exempt from testing).
 
A one-participant 401(k) plan is generally required to file an annual report on Form 5500-SF if it has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement.
 
There are a number of alternatives to a one-participant 401(k) plan. Possible plans for a business owner include the SEP, IRA or Roth IRA, and other types of plans which can be found at the IRS website.
 
Related Resources

About the Author:

Nico Janssen
My name is Nico and I'm serving as a moderator for the Community.

Comments:

Is there a simple way to illustrate how the employer contributions and employee deferrals flow through the federal tax reporting forms? At first glance it seems that the employer portion would be a business expense on Schedule C line 19 (pension and profit sharing plans) and the employee deferral would be deducted on form 1040 line 28 (self-employed SEP, SIMPLE and qualified plans). However, after reading IRS Pub 560 (chapter 5) I am no longer clear on how to proceed. The standard answer is always "ask your tax professional", but I have always done my own taxes and was hoping there was a simple answer. Thanks in advance for any help.
Good info. I prefer the simplicity of a SEP IRA, but I've thought about going with a 401K. Although, I really keep most of my savings outside of retirement plans now, because of the increased control. But then I'm a little paranoid.
There is another advantage of IRA - the absence of the exuberant fees that many 401k charge you. The smaller 401k is the larger fees they tend to assess.
I love your blog.. very nice colors & theme. Did you create this website yourself or did you hire someone to do it for you? Plz reply back as I'm looking to create my own blog and would like to know wheere u got this from. thanks
This is a really good news. I work for the Missouri City LA Fitness during the day and have a 401k there with them. Pretty good returns too. I've been putting together my own training program and am looking to start a small guy in a warehouse which will cater to more individual strength training needs. I was worried about the retirement aspect of such a move though. Now I feel better.
Nice article. I really didn't know this stuff and I've been thinking about what I can do to save for retirement. I've got a one-man business, and this stuff is mostly Greek to me, so thanks for the clarification.
This is a very good article - Bill Reynolds 11-07-2011
Depending on one's particular business, he/she can build a "24K plan". If you are able to leverage your existing customer base and professional relationships, then you can add a bit of gold buying to your business activities. You can learn more at: www.beagoldbuyer.com/invest_in_gold You add this service to your existing offers or do it on the side. Either way, it will pay for itself, or even earn you a profit, while securing your financial future.
I have a sole proprieter business at http://www.crhome.com, is there an advantage to having a company 401K account as opposed to a one person small business account?
401k and IRA plans are just Trojan horses and just because you are ALLOWED to open one as a one person small business does NOT mean that it will be to your advantage to do so. If the government seizes individual retirement accounts or if these types of accounts continue to lose billions per year as they have over most of the past decade you will be out of luck, especially with taxation going up in this country. You're better off putting the money in stocks, bonds, or cash accounts OUTSIDE of a retirement account, or just buy gold and silver bars and coins and watch their value rise until we have interest rates in double digits, THEN SELL and move back into paper. Investors who followed this course of action in the last high inflationary cycle of the 1970s made over 1000 percent on their original investment. You can learn more about this at http://www.certifiedgoldexchange.com or just call your local gold dealer.

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