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The Owner Only, 1 person 401kDid you know that a firm as small as one-person can establish a 401(k)? This is not a new phenomenon. It just never made sense under the old tax law. However, recent changes in the Economic Growth and Tax Relief Reconciliation Act of 2001 have made the 1 person 401(k) plan much more attractive for these small employers. How attractive? Consider a small business owner at age 50, with $50,000 in income. Assume the business owner would like to contribute as much as possible to a tax-deferred retirement plan during 2005. By adopting a Simple IRA plan, the owner can contribute a maximum of $10,000. However, by adopting a 1 person 401(k) plan, the owner can contribute up to $23,294 (26,500 for an incorporated business - see table below) for 2004.  Note that in 2007 the limitation is raised to $45,000 As you can see, the 1 person 401(k) plan offers the small business owner the opportunity to make a much larger a contribution to a tax-deferred retirement plan. This strategy even works well for small businesses with certain non-owner employees. Since the contribution amount is entirely discretionary each year this savings strategy is very flexible. Furthermore, contributions are tax-deductible and grow tax-deferred to make this savings strategy very effective. Additional incentives found in the new tax relief act add to the attractiveness of the 1 person 401(k) plan. For example, the new tax relief act provides small business owners with the ability to take a loan from the 1 person 401(k) plan. Loans are now available to shareholders, partners, and sole-proprietors on a tax and penalty-free basis as long as the loan amount does not exceed the lesser of 50 percent of the account balance or $50,000. Finally, there is no IRS Form 5500 filing expense associated with the initial years of the 1 person 401(k) plan. The 1 person 401(k) plan is not required to file an IRS Form 5500 until the assets in the plan exceed $100,000 or a non-owner employee qualifies for the plan. Therefore, the initial administrative expenses will be minimal. The 1 person 401(k) plan savings strategy is most suitable for firms employing only owners (shareholders, partners, and sole-proprietors) and their spouses. An experienced financial advisor, an ERISA attorney, or a retirement plan administration firm can analyze the suitability of this strategy for your firm. Click here to contact us at Advanced Corporate Planning You should consider a 1 person 401(k) if your business employs only owners and their spouses, including Chapter C corporations, Chapter S corporations, Professional Corporations, partnerships and sole proprietorships and more. A 1 person 401K is not suitable for businesses with employees, or those that may be contemplating expansion in the near future. You can roll over other Retirement Plan Assets into a 1 person 401K If you have money left at a former employer or in an IRA Rollover, use the single person 401(k) to consolidate your retirement savings. The 1 person 401(k) accepts rollovers from other retirement plans, including IRA, SEP-IRA, SIMPLE, 401(k), profit sharing and money purchase plans. You'll benefit from simplified record keeping in one convenient, easy to manage account. Here's a sample of the types of business owners who could benefit from a single person 401(k):
The following charts compare contribution limits for the most popular retirement plan options. As you can see, single person 401K offers higher limits than other types of plans, contributions are flexible and can vary at your discretion from year to year. Contribution LimitsNOTE that you can contribute to the maximum in the table in 3 ways
Enjoy All the Benefits that single person 401K Offers
Single person 401K Plan Highlights
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| Who May Establish | Any business that employs only owners and their spouses (includes corporations, partnerships or sole proprietors). single person 401K is not suitable for businesses with employees. |
| Plan Establishment Deadline | Business tax year-end. |
| Maximum Contributions | Contributions
are discretionary each year. For 2007, the maximum is
the sum of A, B and C below. A. Employer contribution: Up to 25% of compensation 1 B. Salary deferral contribution: Up to $15,500 C. Catch-up contribution for individuals age 50 or older: Up to $5,000 A plus B cannot exceed $45,000 or 100% of compensation. |
| Rollovers | Money can be rolled into single person 401K from most other tax-deferred retirement plans, including traditional IRA, SEP and Keogh. |
| Vesting | 100% immediate. |
| Loans | Available up to 50% of account balance or $50,000, whichever is less. Repayment subject to IRS guidelines. |
| Withdrawals | Available after age 59 1/2 or upon death, disability or plan termination.2 |
| Administrative Requirements | Each plan has its own trustee (example: annual fee $100 per individual participant). Annual IRS 5500 filing required once plan assets exceed $100,000 |
| . | 1 No more than $225,000 of compensation can be taken into account. For unincorporated businesses, compensation is net profit minus one-half of self-employment tax minus employer contributions. 2 Withdrawals are taxable and, prior to age 59 1/2, may be subject to a 10% penalty tax. Mutual fund returns and share prices fluctuate, and shares, when redeemed, may be worth more or less than their original cost. |
Frequently Asked Questions and Answers about single person 401K
If I start my business during the year, can I set up my plan immediately?
Yes. You can start contributing immediately. The single person 401K Plan must be established no later than the last day of the business's tax year.
Can I change to a single person 401K Plan if I already sponsor a plan for my business?
Yes. single person 401K can accept transfers or rollovers from your current plan, but the steps you need to take depend on the type of plan you own and whether you have funded it for the current tax year. Generally, profit sharing plan owners can amend their plans into a single person 401K while money purchase plan owners must terminate their plans first. SIMPLE IRA owners who have made contributions for the current year cannot start up a single person 401K until the following year. And SEP owners may be able to establish a single person 401K for the current year, depending on the type of SEP you have adopted. Contact us for more information.
If I own multiple businesses, is the single person 401K Plan right for me?
Maybe. If you have ownership in more than one business and the businesses are considered to be under common control as defined by the IRS, then your businesses are viewed as a single entity for retirement plan purposes. This means that you must include all employees when setting up a plan and the single person 401K Plan is designed for owner-only businesses. Contact us for more specific information.
Do I need to include part-time employees in the plan?
You may exclude any employee who works fewer than 1,000 hours per year (approximately 20 hours per week for the full year).
Do I have to make contributions into the plan each year?
No. You have the flexibility to decide from year to year how much to contribute -- up to the legal limits.
What is the difference between an employer contribution and a salary deferral contribution?
If your business is incorporated, the employer contribution is based on your W-2 income and is contributed by the business. The maximum employer contribution is 25% of pay. It is not subject to federal income tax or Social Security (FICA) taxes. The salary deferral contributions are withheld from your pay and are excluded from federal income tax but are subject to FICA. The maximum salary deferral amount for 2007 is 100% of pay up to $15,500 -- or $20,500 if you are age 50 or older and making catch up contributions. Your business receives a tax deduction for both salary deferral and employer contributions.
If your business is unincorporated, the employer and salary deferral contributions are based on your net earned income.
Contributions are not subject to federal income tax but are subject to self-employment taxes (SECA). You receive a tax deduction for both salary deferral and employer contributions on your Form 1040.
Can I contribute to a single person 401K Plan for my sideline business if I participate in another employer-sponsored plan?
You can contribute to a single person 401K Plan. However, if you make salary deferral contributions to another employer's plan, you must count those amounts along with any deferrals made to your single person 401K when determining the maximum deferrals that may be contributed for the year. This aggregation is not necessary for employer contributions.
Can the employer contribution vary by participant?
No. Each owner and spouse must receive the same percentage-of-pay contribution. So if you give yourself a 25%-of-pay employer contribution, all participants must receive a 25%-of-pay contribution. This rule does not apply to salary deferral contributions. Each participant may choose how much to defer.
When must contributions be made in order to take a deduction for a given year?
Employer contributions must be made by the business's tax filing deadline plus extensions. Generally, salary deferrals should be deposited by the 15th business day following the month in which they are withheld from pay or business income.
What are my administrative responsibilities?
Since your plan covers only owners and spouses, your administrative requirements are minimal. In addition to remitting contributions to the plan, the IRS requires an annual filing of the Form 5500. Generally, no filing is required until the plan assets exceed $100,000. If you prefer to prepare the 5500 yourself, You can download them from the IRS or contact us and we will send them to you.
What happens if my business grows and I hire employees?
The single person 401K Plan is designed for business owners and their spouses. Contributions are 100% vested immediately and if you give yourself the maximum employer contribution, you are required to contribute the maximum for your employees. Also, a number of additional IRS requirements must be met if your plan includes employees. If you currently have employees or anticipate adding employees soon, work with your financial advisor to select a plan that meets your overall business requirements. Advanced Corporate Planning offers a broad array of retirement plans designed for businesses with employees, including age-based plans and bundled 401(k) plans for any size business
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NOTE:
ALL information contained in this site is for illustration purposes only, and by NO means should be considered individual tax or legal advice under any circumstances whatsoever!
Lynn R. Siewert AIMC
© 2008 Advanced Corporate Planning All rights reserved |
