Can a One-Person Small Business Establish a One-Participant 401(k) Plan?
by nicoj, Community Moderator
- Created: June 8, 2011, 10:52 am
- Updated: June 8, 2011, 11:48 am
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.
- Small Business Retirement Savings Advisor
Interactive question and answer tool that helps self-employed individuals and small business employers determine which type of retirement plan is most appropriate for their businesses.
- Choosing A Retirement Solution for Your Small Business
A pamphlet describing the retirement savings options available to small businesses and comparing the features of each option.
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