Advantages of a one-person 401(k) plan.

Author:Ellentuck, Albert B.

One-person 401(k) plans are becoming increasingly popular for businesses that employ only their owner. Given the right circumstances, these plans can allow a large amount to be contributed on behalf of the owner while maintaining flexibility in making contributions in future years. The cost of preparing the annual return (Form 5500-EZ or Form 5500-SF required after plan assets exceed $250,000) is nominal in comparison to the additional funding a one-person 401(k) plan allows. Also, because the plan has no employees other than the owner, it is not subject to the complicated nondiscrimination tests that normally apply to 401(k) plans.

For 2017, a business owner can make an elective deferral contribution of up to $18,000 ($24,000 if he or she is age 50 or older) plus an employer contribution of up to 20% of self-employment (SE) income or 25% of compensation. In calculating the allowable employer contribution, the owner's SE income or compensation is not reduced by the owner's elective deferral contribution (Sec.404(n)).

Note: Catch-up contributions can be made by individuals age 50 and over if the plan allows. Catch-up contributions are not subject to any other contribution limits. For 2017, the catch-up limit is $6,000 for qualified plans and $3,000 for SIMPLE plans.

However, the total contributions (elective deferral plus the employer contribution) cannot exceed the lesser of 100% of the participant's compensation or $54,000 ($60,000 if age 50 or older) for 2017.

Example. Maximizing contributions with a one-person 401 {k) plan: R, age 50 (by the end of the current year), is the sole owner and employee of a sole proprietorship. The sole proprietorship is also the sole source of R's earned income. R earns $180,000 (net of the SE tax deduction) in the current year and wishes to maximize contributions to a retirement account. R believes that the business will probably continue to be profitable, but he would like the flexibility of determining on a year-to-year basis how much to contribute. R does not expect to hire employees and will remain a one-person company.

The table on p. 830 reflects the maximum amount that can be contributed to a profit sharing plan with a 401(k) feature (a one-person 401(k) plan) by R in 2017. In contrast, R's 2017 contribution to a profit sharing plan without a 401(k) feature or a SEP without a salary reduction feature (a regular SEP) would be limited to $36,000 (20% x $180,000).

Note: Catch-up contributions for...

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