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401(k) Plans for Owner-Only Businesses

“Can an unincorporated, owner-only business have a 401(k) plan and, if so, are there any special considerations of which we need to be aware?”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with an advisor in North Carolina is representative of a common question related to owner-only businesses and retirement plans.

Highlights of Discussion

Example:

Ryan is a sole proprietor who would like to set up a solo k plan effective for 2020.  The IRS extended his tax filing deadline for 2020 [6]to May 17, 2021, and if Ryan files for an extension, his extended tax deadline would be October 15, 2021. Therefore, the latest Ryan could potentially set up a solo k plan for 2020 would be October 15, 2021. Since Ryan is past the deadline for making a salary deferral election for 2020, however, his contribution would be limited to an employer profit sharing contribution based on his adjusted net business income for 2020. The sooner Ryan sets up the solo k for his business, the sooner he will be able to make employee salary deferrals for 2021.

Conclusion

For self-employed individuals and their tax advisors, there are several special considerations with respect to setting up and contributing to solo (k) plans, including, but not limited to, the deadline for establishing a 401(k) plan, the deadline for making a salary deferral election, and the owner’s compensation for contribution purposes.

[1] [7] Section 201 of the Setting Every Community Up for Retirement Enhancement Act of 2020