Back to Retirement Planning

This week, we’ll pick up where we left off in our series on Retirement planning for the small business owner. Today, we’re going to take a look at the Owner-Only 401(k), also commonly referred to as the Solo 401(k).

The IRS actually has a great resource regarding this plan and its specifics as found at the following link:

http://http://www.irs.gov/retirement/article/0,,id=238750,00.html

Let’s hit the highlights!

This plan is, as the name indicates, applicable to employers/owners with no eligible non-owner employees other than their spouse. Your business can be a corporation, partnership, or sole proprietorship. It offers flexibility and the ability to put away a large of sum of funds based on your taxable compensation.

What are your funding options?

There are two elements to the funding of a Solo 401(k). First, like any 401(k) plans, the employee (you the owner) can make elective deferrals up to 100% of compensation up to the annual contribution limit - $16,500 in 2011 ($22,000 if age 50 or over). In addition to this elective deferral, the employer (you the owner) can make nonelective contributions up to 25% of compensation as defined by the plan or per the self-employed individual guidelines as established in IRS Publication 560. The overall level of contributions cannot exceed $49,000 (or 54,500 if over age 50) in 2011.

In order to establish your funding pattern and understand your funding deadlines, contact your CPA to coordinate with your payroll service provider and your 401(k) provider.

Nondiscrimination Testing

One roadblock that small business owners often cite regarding 401(k) plans is that of nondiscrimination testing. This testing, “top heavy” testing, ties what you as an owner can match in employer funds directly to that of your employees. With the Solo 401(k), this potential roadblock is removed since there are no employees who could have received disproportional benefits. It is important to note that this test-free advantage disappears if an employee is hired.

Administration & Reporting

This sort of plan is generally required to file an annual report on Form 5500-EZ once plan assets are $250,000 or more in value at the end of the year. A plan with fewer assets may be exempt from the annual filing requirement.


As with any retirement plan decisions, your specific facts will determine the best fit for you. However, this plan can be a great tool for those business owners who do not employee any statutory employees. If you fall into this category and want more information on whether this plan is a good fit for you, please contact our Firm.

brad@mcarthurco.com
704.544.8429