Owner-only businesses, such as a sole proprietorship or consultant, can have a tax-qualified retirement plan, even if your business is not incorporated. Some refer to these as “Solo 401(k) Plans.” These plans must satisfy all of the same rules that apply to other 401(k) plans, but some of them are automatically fulfilled when the plan only covers the business owner. For example, an owner-only plan automatically satisfies annual nondiscrimination requirements, it does not need to provide some of the required plan notices, and it is exempt from Form 5500 filings when total assets on the first day of the plan year are less than $250,000.
There are a few special considerations and potential pitfalls for these plans.
- The deadline to establish one is the business’ tax filing deadline plus any applicable extensions. Salary deferrals can only be made prospectively, and the salary deferral election must be made before the end of the business's taxable year.
- Any other owners of the business who own less than 5% of the company may be considered non-highly compensated employees and therefore could subject the plan to nondiscrimination testing requirements.
- If the owner or any relatives have ownership interests in other organizations, those other businesses need to be evaluated for retirement plan purposes.
- If the business is a S corporation, only amounts that the owner reports and takes as W2 compensation can be considered when determining the maximum allowable contributions; year-end distributions of profits are ignored. If the business is a partnership or sole proprietorship, there are complicated calculations required. We strongly recommend that you work with your accountant or tax advisor to determine the amount of any earned income and maximum contribution for plan purposes.
Your Vestwell representative can assist you in setting up the plan design best suited to your business. You may also reach out to our sales team at firstname.lastname@example.org