One-person 401(k) plans can provide a valuable source of retirement savings for successful entrepreneurs. Given the right circumstances, such plans allow large contributions on behalf of a business owner and maintain flexibility for making contributions in future years.
For 2015, a business owner can make an elective deferral contribution of up to $18,000 (and an additional $6,000 catch-up contribution if he or she is age 50 or older at year-end) plus an employer contribution of up to 20% of self-employment (SE) income unreduced by the elective deferral or 25% of compensation.
The total contributions (elective deferrals of up to $18,000, plus the employer contribution) cannot exceed the lesser of (1) 100% of the participant’s SE income or compensation of (2) $53,000 for 2015. Catch-up contributions to 401(k) plans of up to $6,000 in 2015 are not included in the annual additions limit.
Example: Maximizing contributions with a one-person 401(k) plan.
Kevin, age 63 is the sole owner and employee of Training Solutions, a sole proprietorship. In 2015, Kevin earns $145,000 (net of the SE tax deduction) and wishes to maximize contributions to a retirement account. He believes the business will probably continue to be profitable, but would like the flexibility of determining the amount to contribute each year. Kevin does not expect to hire employees.
The following table reflects the maximum amount that Kevin con contribute to a 401(k) plan for 2015.
| Employer contributions ($145,000 x 20%) | $29,000 |
| Elective 401(k) deferrals | 18,000 |
| Contributions subject to annual limit | 47,000 |
| Catch-up contribution | 6,000 |
| Total contributions for 2015 | $53,000 |
As an additional benefit, a business owner can borrow from his or her 401(k) plan if the plan document so permits. The maximum loan amount is 50% of the account balance or $50,000, whichever is less.
When the business employs someone other than just the owner, 401(k) contributions may be required for the other employees, in which case the plan would become a standard 401(k) plan with all the resulting complications. However, the plan can exclude from coverage any employee who is under 21 and any employee who has not worked for at least 1,000 hours during any 12-month period.
Also, if the business’s only other employees are the owner’s spouse and/or children, a 401(k) plan covering those individuals may be more attractive than a one-person 401(k) plan, especially for owners hitting the $53,000 contribution limit.