Individual 401(k) Plan

Advantages of having an Individual 401(k) Plan:

With an individual 401(k) plan, a business owner may contribute more to his account than under IRA plans including SEPs and SARSEPs. Individual 401(k) plans allow for participant loans and hardship withdrawals which add flexibility that is lacking in IRA plans.

Tax Advantages: Employer contributions are deductible on the employer’s federal income tax return to the extent that the contributions do not exceed the limitations described in section 404 of the Internal Revenue code and the elective deferrals and investment gains are tax deferred until distribution.

 

Who adopts an Individual 401(k) Plan?

Sole Proprietorships and companies with no employees other then the owner’s spouse can establish an Individual 401(k) plan. Business owners that want low administrative costs and also want to allow for high contribution limits will choose to adopt an Individual 401(k) plan over a SEP, SARSEP or traditional IRA. Contributions to an Individual 401(k) plan are discretionary.

 

Highlights:

If you establish an Individual 401(k) plan, you:

• Can have other retirement plans.

• Need to annually file a Form 5500 if the plan’s assets exceed $100,000.

 

Pros and Cons:

• Greater flexibility in contributions.

• Employees may contribute more to this plan than under IRA plans.

• Good plan if cash flow is an issue.

• Optional participant loans and hardship withdrawals add flexibility for employees.

• Need to test that benefits do not discriminate in favor of the highly compensated employees. This testing can be complicated.

• Additional withdrawal and loan flexibility adds administrative burden for the employer.

 

Who Contributes:  In a 401(k) plan contributions are made through employee salary deferrals and/or employer contributions.  Employees are always 100% vested in their own contributions.  Employer contributions may be vested on a graduated vesting schedule.

 

Contribution Limits:

Employer/Employee – The lesser of 25% of compensation or $49,000 in 2011

 

Filing Requirements:  Annual filing of Form 5500 is required if the plan’s assets exceed $100,000.

 

Compliance Testing: Plan not subject to annual non-discrimination testing.

 

Participant Loans:  Permitted.

 

In-Service Withdrawals:  Yes, but subject to possible 10% additional tax if under age 59-1/2.