Individual(k) Details

An Individual(k) Plan (also known as a “solo-k,” “uni-k,”  or “owner only” plan), is just a Traditional 401(k) plan covering business owners or partners and their spouses with no other employees. These plans have the same rules and requirements as any other 401(k) plan. We distinguish Individual(k) plans only because for most small business owners they offer advantages. Once common law employees are hired this plan needs to be transitioned to a ERISA Plan.

Open an Individual(k)

Contributions

The business owner wears two hats under an Individual(k) plan: employer and employee. Contributions can be made to the plan in both capacities. As employer, the owner can contribute both:

  • Elective deferrals of as much as 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit. A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that the limits on elective deferrals are by person, not by plan.  The employee can designate contributions as either pre-tax or Roth (post-tax) funds.
  • Employer non-elective contributions up to 25% of compensation. Employer contributions can be made on behalf of Roth-designated employee contributions; however, the employer match must be made on a pre-tax basis.

Additional 401(k) Contribution Information

If you contribute more than the maximum limit in a given year, the excess and any earnings on it must be withdrawn or corrected by the filing deadline (no extensions) of the following year. This usually occurs only for business owners who work a second job and neither company enforces the contribution limit.

Distributions

You must begin taking Required Minimum Distributions (RMDs) from the Individual(k) account by April 1 of the calendar year after you turn 70½ or by April 1 of the calendar year after you retire, whichever is later. The amount of the RMD is calculated according to tables provided by the IRS based on life expectancy. RMDs apply to both pre-tax and Roth contributions. The same penalty assessed on failure to meet IRA RMDs (50%) applies to Individual(k) RMDs. However, you are eligible to take distributions at 55.

Testing for Non-Discrimination

A business owner with no common-law employees does not need to perform nondiscrimination testing for the plan, since there are no employees who could have received disparate benefits.

Reporting

An Individual(k) plan is generally required to file an annual report to the IRS on Form 5500-SF if it has $250,000 or more in assets at the end of each year. A plan with fewer assets may be exempt from this requirement.

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