Solo 401k

FAQ about Solo 401k plans from 401kBrokers.com

2006-04-04T12:04:00.000-07:00

Here are some answers to frequently asked questions about our Solo & Company 401k plans: Click here for more information about ROTH 401k contributions.
Q: Who offers and maintains this plan?
A: These Solo 401k & Company 401k plans are offered exclusively by 401kBrokers.com and administered by our wholly owned subsidiary, 401kAdministrators.com. You may invest in thousands of mutual funds, stocks, bonds and options and even take loans from your account if desired.
Q. Who is the custodian of the assets?
You can choose just about any mutual fund company, fund supermarket, brokerage house or custodian you wish to serve as the custodian of the assets in your 401k plan. Call us at 800-474-3826 if you have any questions. All checks are made payable to your chosen custodian and all rollover money goes directly to that custodian.
Q. Who is the Administrator of the 401k plan?
A: You are the "Plan Administrator" as that term is used in the Federal Law known as "ERISA". 401kAdministrators.com serves as the Third Party Administrator ("TPA") providing technical and administrative support services including qualified plan establishment, recordkeeping, reporting, compliance, loan administration and processing. You may even add our integrated electronic payroll processing and tax filing services for a very modest price. See how our payroll service works.
We have setup kits for our Solo 401k plans at Ameritrade, E*Trade, Fidelity, Schwab, TD Waterhouse Institutional Services and Vanguard among many others (if you do not see your favorite brokerage or custodian listed here, simply request it from us. You can also choose just about any mutual fund company, fund supermarket, brokerage house or custodian you wish, to serve as the custodian of the assets in your 401k plan. Call us at 800-474-3826).
Our Solo 401k's are not available directly from these custodians. In order to participate in a Solo 401k, you must have established a qualified employer sponsored retirement plan before opening an investment account. That is where we come in. We set up and service your qualified employer sponsored retirement plan (Solo 401k plan) that then allows you to become eligible to participate in the various retirement investment accounts. If have one or more employees and you would like open a Company 401k plan, you may call us at 800-474-3826, or submit a plan design questionnaire or your current basic plan document, adoption agreement & summary plan description (SPD).
Q. Where do I mail the account enrollment forms?
A: 401kAdministrators, 1205 Prospect St., Suite 400, La Jolla, CA 92037.
Q: I am a Subchapter S Corporation. Can I have a Solo 401k?
A: Yes. Sole proprietors, partnerships, corporations (including S-corporations), LLC’s, and LLP’s may all establish 401k plans.
Q: What about tax returns for the 401k plan, who handles those?
A: We prepare your 401k plan tax return at no additional charge. (Tax returns are required if the plan assets exceed $100,000, or have ever exceeded $100,000 but have since fallen in value, or you have one or more eligible employees or a non-spouse participant or you have a non-standard asset in your 401k plan (such as real estate or some asset not readily capable of being valued without a price opinion or an appraisal). When the plan assets exceed $100,000, 401kAdministrators.com prepares the IRS Form 5500 or Form 5500 EZ and accompanying schedules for you to sign and submit.
(If you had to prepare the Form 5500 yourself bear in mind that the IRS estimates the average time to complete and file a Form 5500 is 18 hours and 10 minutes for recordkeeping, 2 hours and 49 minutes for learning about the law or the form, 5 hours and 6 minutes preparing the form and 32 minutes for copying, assembling and sending the form. That is a total of 26 hours and 37 minutes. We prepare your plan tax returns for you at no additional charge.
Q: Is there an additional fee for the preparation of the Form 5500 or Form 5500EZ?
A: No
Q: Can my spouse participate in my Solo 401k plan?
A: If your spouse earns income from your business, your spouse can participate.
Q: Is there an additional fee for my spouse to participate in my Solo 401k plan?
A: No.
Q: What about tax returns if my spouse participates in my Solo 401k?
A: Unlike the case of employing your child, (see below) when you employ only your spouse, tax returns are still not required until the plan assets exceed $100,000. When the plan assets exceed $100,000, 401kAdministrators.com prepares the IRS Form 5500 (or Form 5500 EZ) for you to sign and submit with your tax returns.
Q: What if I have partners? Can I still have a Solo 401k plan?
A: You can now have a 401kBrokers.com Streamlined™ 401k plan with just one or more business partners and no other employees. You can still have a 401k plan, but it won't be a "Solo" 401k plan per se. It may be subject to top heavy testing, and the anti-discrimination rules unless your partner(s) is/are a 5% or greater owner or is "highly compensated" (receives more than $100,000 in income from the business (2006) and you have no other employees other than your partner(s).
Tax returns are required even if the plan assets are less than $100,000. (You now file a full Form 5500 with accompanying schedules). We will prepare the Form 5500 at no additional cost.
Our fee for a partnership 401k with 2 partners and no other employees is $350 per year plus 25 basis points (1/4th of 1%) annually.
Q: What if I employ my child in my business? Can I still have a 401k plan?
A: You can still have a 401k plan, but it won't be a "Solo" 401k plan per se as you will now be subject to top heavy testing, and the anti-discrimination rules unless your child is a 5% or greater owner or is "highly compensated" (receives more than $95,000 in income from the business (2005) and you have no other employees other than your spouse.
Q: If I employ my child in my business does this affect the plan tax returns?
A: Yes. Tax returns are now required even if the plan assets are less than $100,000. (A full IRS Form 5500 is required not just a Form 5500 EZ).
Q: Can a non-profit sponsor a 401k, including a Solo 401k?
A: Yes. I.R.C. §401(k)(B)(i) pertaining to eligibility of state and local governments and tax-exempt organizations specifically makes tax-exempts eligible sponsors of 401k retirement plans. "...Except as provided in clause (ii), any organization exempt from tax under this subtitle may include a qualified cash or deferred arrangement as part of a plan maintained by it..."
Q: Is there an online area for me to check and make changes to my account?
A: Yes, each custodian of assets has an online area for you to check and make changes to your account 24/7.
Q: Can I make my contributions online?
A: Yes
Q: Can I set up an auto debit of my contributions from a checking account?
A: Yes
Q: Is there a mandatory minimum that I must contribute?
A: No. Contribution amounts are completely flexible. If you had a good year, you can put in more, up to the limits. You can always put in less or nothing at all.
Q: How much to open an account?
A: To open an account, Ameritrade & Schwab require $250, and E*Trade & Vanguard both require at least $1,000. First time investments in fund selections must meet initial fund minimums (mostly $3,000 at Vanguard, although one Vanguard fund has a $1,000 minimum, the Star Fund). Once you have opened your account and met the initial minimum for a particular fund, you may thereafter invest less than the initial minimum.
Q: Do I have to the ability to alter the amount I contribute at any time?
A: Yes
Q: Where do I send contribution or rollover checks?
A: Send your initial contribution (payable to your chosen custodian, (i.e. Ameritrade, Schwab, Vanguard E-Trade, Fidelity or other custodian)) with your application to 401kAdministrators, 1205 Prospect St., Suite 400, La Jolla, CA 92037. You should include your name and account number on the check.
Thereafter, contribution and rollover checks should be submitted electronically or sent directly to:
Ameritrade: P.O. Box 2813, Omaha, NE 68103-2813 (By mail only, not electronically).
Schwab: Checks should be mailed to your nearest Schwab Operations Center, either: Charles Schwab & Co., Inc., P.O. Box 628291, Orlando, FL 32862-8291 or Charles Schwab & Co., Inc., P.O. Box 52114, Phoenix, AZ 85072-2114. (By mail or electronically).
Vanguard: Small Business Services Dept. 8C1, P.O. Box 1106, Valley Forge, PA 19482-1106. You should include your name and account number on the check or in a cover letter or with an invest by mail slip from your account statements. (By mail or electronically).
Q. Who is the trustee and account owner?
A: You are the trustee and account owner.
Q: Do I need to have an Company Employer Identification Number ("EIN") (also known as a Taxpayer Identification Number "TIN") to open a Solo 401k or, as a Sole Proprietor can I use my Social Security Number?
A: Vanguard and Schwab now require you to have an IRS issued Employer Identification Number ("EIN") if you will be selecting Vanguard or Schwab as the custodian of your 401kBrokers.com Solo 401k. (You may no longer allow you use your Social Security Number as the "Plan Tax Id"). If you choose Ameritrade as your custodian, you can still open a Solo 401k plan with your Social Security Number.
You can apply for a Company "EIN" or a Plan "EIN" (a tax identification number specifically for you 401k plan) online here or at https://sa.www4.irs.gov/sa_vign/newFormSS4.do. As part of our administrative service, at no additional cost to you, we will apply for a plan EIN on your behalf. (The EIN can be for the 401k plan itself or for the company).
In any event, you must have a Company EIN or a Plan EIN if a tax return must be filed for your plan as the IRS does not allow the plan tax return to be filed under a Social Security Number.
Q. Who makes the investment decisions?
A: You or your advisors make the investment decisions. 401kAdministrators.com does not make investment decisions for you.
Q: What are the total fees and costs?
A: There is no set up fee and no minimum annual maintenance fee for any of our 401k plans.
For Solo 401k plans, (including spouses) our total administrative fee is a quarter point of the value of the 401k plan each year. A quarter point is also expressed as one fourth of one percent (¼ of 1%) or (¼%) or (.25%) or (25 basis points) of the 401k plan value. This is a yearly administrative fee payable to 401kAdministrators.com as the Third Party Administrator ("TPA"). (For every $10,000 in plan assets it is a $25 annual fee and for every $100,000 in plan assets it is a $250 annual fee.)
For 2+ employee 401k plans, (meaning the owner and at least one non-spouse employee) our total administrative fee is a quarter point of the value of the 401k plan each year plus a flat fee of $1,000 per year.
There are no additional fees. We personally answer questions, provide plan design and plan document establishment, amendments, and modifications, plan administration, tax reporting, monitoring, compliance, discrimination testing, maximum contribution calculations, arrange loans, and we prepare IRS Form 1099's and Form 5500's (plan tax returns) at no additional charge.
The annual fees are pro-rated and assessed quarterly. One fourth (1/16th of one percent (.0625%)) is charged each quarter.
There are no fees to purchase the Vanguard mutual funds. (Mutual fund managers do charge to manage all mutual funds and you will incur additional costs using the Vanguard Brokerage Services to purchase other fund families, stocks, bonds, options etc. See here: Vanguard Costs). There are fees to purchase mutual funds at Ameritrade and Schwab.
Q: Can I restrict participation to employees who have worked 2 years with a minimum of 1,000 hours to qualify for a year?
A: A 401k plan may require up to one year of service before allowing employees to make elective contributions. [Treas. Reg. Sec. 1-401(k)-1(e)(5)]. (You may also require a minimum of 1,000 hours to qualify for a year.) If a 401k Plan also provides for employer contributions, employees can be required to complete up to two years of service before becoming entitled to receive those contributions. In that case however, the law requires employees to be 100% vested in their accounts attributable to employer contributions. [I.R.C. Sec. 410(a)(1)(B)(i)].
Q: How does 401kBrokers.com get paid?
A: 401kBrokers.com markets the program on behalf of our wholly owned subsidiary, 401kAdministrators.com, the Third Party Administrator on the 401k plan, who receives the annual administrative fee. We are paid from that fee.
Q: How are the administrative fees actually paid?
A: The Plan Sponsor (the self-employed person opening the Solo 401k) pays the administrative fees directly to 401k Administrators via ACH bank transfer, Visa, Mastercard, Discover or American Express or by Paypal. The administrative fees do not come from the 401k plan assets and do not reduce investment returns or contribution amounts.
Q: Are the administrative fees a deductible business expense?
Yes. The administrative fees are a deductible business expense and in certain instances may qualify for a tax credit.
Q. Does Ameritrade, Schwab or Vanguard pay 401kBrokers.com or 401kAdministrators.com?
A: None of the custodian of assets pay 401kBrokers.com or 401kAdministrators.com any commissions, compensation, fees, or money of any sort. Your 401k plan assets are never reduced to pay our fees.
Q. Are there other commissions or service fees?
A: To purchase Vanguard mutual funds, there are no service fees or brokerage charges or commissions. (Using the Vanguard Brokerage Services to purchase other fund families, stocks, bonds, options etc., will incur fees.) See here: Vanguard Costs.
401kBrokers.com does not charge anything more than the 25 basis points (1/4th of 1%) administrative fee, not even if you want a loan from your 401k ($0 setup and $0 each year the loan remains outstanding).
Q: At Vanguard, is this plan limited to only Vanguard no load index funds?
A: Not only can you purchase any of the Vanguard no load funds, (including both the Vanguard index funds and the actively managed funds), you can use Vanguard FundAccess to purchase any exchange traded stocks, foreign securities, bonds, options, mutual funds from other fund families, fixed income securities such as U.S. Treasury Securities (including zero-coupon and inflation-indexed), Corporate bonds, Municipal and U.S. Government Agency Bonds, Mortgage-backed securities and Certificates of Deposit (CDs). Many mutual funds from other fund families have no transaction charges as well. Go to Vanguard for the Vanguard FundAccess fund listing or click here for a complete list of the costs associated with using Vanguard Brokerage Services.
Q: Is my Solo 401k or Company 401k protected from my creditors?
A: Yes. On April 20th, 2005 the President signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“Act”). The Act makes significant changes in the bankruptcy rules, including adding specific protections for retirement plans. The Act goes into effect for bankruptcy petitions filed after October 16, 2005.The new law exempts from the bankruptcy estate assets held by a qualified plan (Solo 401k or Company 401k), 403(b) plan, 457 plan or IRA (traditional, Roth, SEP and SIMPLE). The effect of the exemption is to place retirement plan assets beyond the reach of creditors during or after a bankruptcy proceeding. The exemption for retirement plan assets applies irrespective of whether the debtor elects the federal or state bankruptcy exemptions. However, the new law contains an exception for federal tax liens and limits the application of the exemption for IRAs to $1,000,000. The new law imposes no dollar limitation on the exemption for other retirement plans (Solo 401k or Company 401k). Amounts directly rolled over to another retirement plan (i.e. into a Solo 401k or Company 401k) or IRA qualify for the exemption as do amounts distributed and rolled over within the 60-day rollover period.
Q: How much can I contribute to my Solo 401k each year?
For 2004: A: The maximum employee and employer contributions combined may not exceed $41,000 in 2004 (if you are under 50) and $44,000 if you are older than 50 (or if you turn 50 in 2004).
For 2005: A: The maximum employee and employer contributions combined may not exceed $42,000 in 2005 (if you are under 50) and $46,000 if you are older than 50 (or if you turn 50 in 2005).
For 2006: A: The maximum employee and employer contributions combined may not exceed $44,000 in 2006 (if you are under 50) and $49,000 if you are older than 50 (or if you turn 50 in 2005).
Please feel free to use our calculator. When you send a check to Vanguard (or other custodian or brokerage) to contribute to your 401k plan (or you make an automatic investment), you need not declare to them whether it is an employee contribution or an employer contribution, but you must keep track yourself and let us know upon request.
Q: What is the maximum I can contribute as an employee each year?
For 2004: A: Employees under 50 can contribute up to 100% of their earnings (not to exceed $13,000) as an employee contribution to their Solo 401k plan. (Employees who are older than 50 (or who turn 50 in 2004) can contribute up to 100% of their earnings not to exceed $16,000) as an employee contribution to their 401k plan.
For 2005: A: Employees under 50 can contribute up to 100% of their earnings (not to exceed $14,000) as an employee contribution to their Solo 401k plan. (Employees who are older than 50 (or who turn 50 in 2004) can contribute up to 100% of their earnings not to exceed $18,000) as an employee contribution to their 401k plan.
For 2006: A: Employees under 50 can contribute up to 100% of their earnings (not to exceed $15,000) as an employee contribution to their Solo 401k plan. (Employees who are older than 50 (or who turn 50 in 2004) can contribute up to 100% of their earnings not to exceed $20,000) as an employee contribution to their 401k plan. If you have established a separate designated "ROTH 401k" account you may divide the total employee contribution (plus the "catch up") between the ROTH 401k account and the traditional pre-tax 401k account in any percentage you choose. You may take a tax deduction for the amounts contributed to the traditional pre-tax 401k account but you may not take a tax deduction for the amounts contributed to the ROTH 401k account. You may not exceed the total of $15,000 ($20,000 if age 50 or older) between both the traditional pre-tax 401k account and the ROTH 401k account. You may not make an employer contribution or employer profit sharing or employer matching contribution to the ROTH 401k account.
Q: What is the maximum I can contribute as an employer each year?
A: In addition to the allowable employee contributions (see above),
Incorporated employers can contribute up to 25% of their W-2 earnings as an employer contribution to their 401k plan. You may not make an employer contribution or employer profit sharing or employer matching contribution to a ROTH 401k account.
Unincorporated employers can contribute up to 20% of their self-employment income* as an employer contribution to their 401k plan (in addition to the allowable employee contributions (see above). (*Self employment income is not the exact same number as your profit or loss on Schedule C, line 31. To calculate your "self-employment income" based on your profit on Schedule C line 31, deduct one half of your social security tax from your profit on Schedule C line 31 or use our calculator to make the precise calculation. You may not make an employer contribution or employer profit sharing or employer matching contribution to a ROTH 401k account.
Q: How do I report to the IRS the contributions I make as an employee each year?
A: Employee contributions, other than amounts contributed to the ROTH 401k account, are totaled and inserted on line 28 of your own personal 1040 form. Your W-2 Box 1 does not include your pre-tax elective deferrals. It is reported in W-2 Box 12 and W-2 Box 13 should be checked "Retirement Plan".
For additional guidance, please see pages 7 & 9 of the IRS W-2 instructions.
Q: How do I report to the IRS the contributions I make as an employer each year?
A: If you are a corporation: Employer contributions, (which does not include the amounts contributed to the ROTH 401k account by the employees from their salary deferral), are totaled and inserted on line 24 of the corporate 1120 tax return form.
If you are a sole proprietor: Contributions made by you as an employer on behalf of any other participant other than yourself are totaled and inserted on line 19 of your Schedule C tax return form. Whether this should include employer contributions on behalf of your spouse depends on whether he she she is a part owner of the company and whether you live in a community property state. See below. See here for Schedule C Instructions.
Contributions made as an employer on your own behalf do not go on Schedule C. Enter all contributions made as an employer on your own behalf, except for the amounts contributed to the ROTH 401k account, on Form 1040 line 28, not on Schedule C.
Husband-wife business. If you and your spouse jointly own and operate a business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. Do not use Schedule C or C-EZ. Instead, file Form 1065. See Pub. 541 for more details. Exception. If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U.S. possession, you can treat the business either as a sole proprietorship or a partnership. The only states with community property laws are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A change in your reporting position will be treated as a conversion of the entity.
If you treat the business as a partnership and file 1065, your spouse's earnings will be reported under a W-2 or K-1. As a partner in a partnership (or LLC taxed as a partnership), you can contribute 20% of the income distributed to you as profit at the end of the year (K1) as your profit sharing contribution because in the partnership context, as long as you materially participated in the management of the company, your K1 distribution is subject to Social Security Tax. You may only base the profit sharing on compensation subject to Social Security Tax.
Schedule C in a community property state
If you and your spouse wholly own an unincorporated business as community property in a community property state and you file Schedule C, the employer profit sharing maximum contribution for both spouses will be a total of 20% of total net profit, less one half the social security tax. Since both spouses are co-owners, in a community property state neither should take the deduction for the employer contribution on behalf of an employee on Schedule C, but rather they should share the employer profit sharing maximum contribution for both spouses of 20% of total Schedule C net profit, less one half the social security tax. There would seem to be no additional need to establish that a spouse has earnings from employment in the form of actual wages, bonuses, salary or commissions.
Schedule C in a non-community property state
If you and your spouse do not jointly own and operate a business and do not share in the profits and losses and instead, you treat the business as a sole proprietorship of one of the spouses and you file Schedule C in a non-community property state, the employer profit sharing maximum contribution will be a total of 20% net profit (less one half the social security tax). In order to establish that the non-business owner spouse has earnings from employment, and justify a 401k contribution by or on their behalf, the non-owner spouse in a non-community property state should have evidence of compensation from the business owner spouse in the form of actual wages, bonuses, salary or commissions.
Single-member limited liability company (LLC)
If you are an LLC: Please review IRS publication 3402 as the tax return you file depends on your particular LLC. Generally, a single-member domestic LLC is not treated as a separate entity for federal income tax purposes. If you are the sole member of a domestic LLC, file Schedule C or C-EZ (or Schedule E or F, if applicable). However, you can elect to treat a domestic LLC as a corporation. See Form 8832 for details on the election and the tax treatment of a foreign LLC.

Q: What amounts are subject to FICA (Federal Insurance Contribution Act) withholding?
A: Elective contributions (Employee salary deferral) to a 401k plan are subject to FICA withholding at the time contributions are made (up to the "taxable wage base").
In the company 401k context, Employer Matching Contributions and Employer Profit Sharing Contributions are not subject to FICA withholding, either at the time the contributions are made or at the time a distribution is made to a participant. See Internal Revenue Code Section 3121 (a)(5)(A).

This is also true for Employer contributions in Solo 401k's where the sponsoring entity is a corporation and the wages are paid under a W-2. This is also true for for Employer contributions in Solo 401k's where the sponsoring entity is a sole proprietor and the employer contribution is made on behalf of another (in a Solo 401k, that is typically just the spouse), because in this instance the employer contribution is a line item expense entered on the Schedule C and therefore is not subject to FICA (SE Tax).

Where the sponsoring entity is a sole proprietor and the employer contribution is not made on behalf of another (such as the Spouse), the employer contribution does not appear as an expense on the Schedule C and therefore is in fact subject to FICA (SE Tax).

The employer contribution is calculated based on net earned income for Sole Proprietors and on W-2 wages for Corporations. The net earned income and the W-2 wages themselves are always subject to FICA, but the employer contribution is not subject to FICA unless the sponsoring entity is a sole proprietor and the employer contribution is not made on behalf of another (such as the Spouse).
In other words, where the sponsoring entity is a sole proprietor and the employer contribution is made on behalf of oneself, the employer contribution is also subject to FICA.
The 2006 "taxable wage base" of $94,200 is $4,200 higher than the 2005 amount ($90,000), and the maximum additional Social Security tax that might be collected on someone earning above the 2005 wage base is $260.40. This is the largest increase since 2002 in both dollars and in percentage, and reflects the largest increase in national average wages since 2000.
The taxes paid by employees are matched by identical amounts paid by employers into the Social Security system. Taxes for self-employed individuals use the same earnings base, but the rates are double those of employees, since the self-employed must also pay the 'employer' portion of the taxes.
This means that high-earning, self-employed individuals may owe as much as $520.80 in additional self-employment tax in 2006. However, they can recoup some of this amount through a deduction on their federal income tax. About 11.3 million workers will be affected by the higher wage base in 2006.
Q: What amounts are subject to FUTA withholding? (Federal Unemployment Tax)
A: As with FICA, elective contributions (Employee salary deferral) to a 401k plan are subject to FUTA withholding but matching contributions or profit sharing contributions (Employer contributions) are not subject to FUTA withholding. (The maximum amount of wages paid to an employee during any calendar year that may be subject to FUTA tax is $7,000 (in 2004) but this amount may be periodically adjusted through legislative amendment).
Q: As a Subchapter "S" Corporation, can I contribute 25% of the income distributed to me as profit at the end of the year (K1) or is it only 25% of my W-2 wages.
A: You may not base the 25% on income distributed to you as profit at the end of the year (K1). You may only base the 25% on W-2 wages (plus any other wages subject to Social Security Tax (bonuses, overtime etc.)).
Q: As a partner in a partnership (or LLC taxed as a partnership), can I contribute 20% of the income distributed to me as profit at the end of the year (K1) as my profit sharing contribution or is it only 20% of my W-2 wages.
A: You may base the 20% on income distributed to you as profit at the end of the year (K1) because in the partnership context, as long as you materially participated in the management of the company, your K1 distribution is subject to Social Security Tax. You may only base the profit sharing on compensation subject to Social Security Tax.
Q: If someone owns a one-member LLC that anticipates a net income of about $280,000 what is the best strategy for maximizing deductions when including the spouse in the plan?
A: Under an LLC taxed as a corporation, $112,000 in W-2 wages for each spouse will allow for the maximum 401k contributions in 2005. So, pay the husband approximately $112,000 on a W-2 and pay the wife approximately $112,000 on a W-2. From his W-2 income, H defers $14,000 into the plan and W also defers $14,000 into the plan (unless they are over 50 or turn 50 this year, in which case they can each defer $18,000 of their W-2 income into the plan). The remaining net income after the W-2's is approximately $56,000. From the remaining net income of $56,000 have the LLC contribute $28,000 for the husband (25% of $112,000) and $28,000 for the wife (25% of $112,000) in profit sharing, leaving no remaining net taxable income to the LLC or its member(s) to distribute under a K-1.
Q: When do I have to make my contributions by?
A: Generally speaking employer profit sharing contributions can be made up to the filing of the tax return (including extensions). See I.R.C. §404(a)(6). Employee salary deferrals must be contributed to the plan no later than 15 business days after the end of the month in which the contributions would have been paid to the employee in cash if not withheld from wages [DOL Regulation §2510.3-102(a)].
Since sole proprietors are deemed to have received their entire income as of the last day of the year, employee salary deferrals for a Sole Proprietor can be contributed up until no later than 15 business days after the close of the year.
Corporations, including small business owners who choose to do business under a corporation and who pay themselves a W-2, must contribute the employee salary deferral portion into the plan no later than 15 business days after the end of the month in which the contributions would have been paid to the employee in cash if not withheld from wages [DOL Regulation §2510.3-102(a)].
Q: Can a salary deferral only be made from income after the 401k is established?
A: "Yes, or it would not be a deferral", according to Mary Anne Boyker IRS Customer Service ID3103130. However, see important news for Sole Proprietors immediately below...
Q: If you are a cash basis taxpayer when is the income deemed to have been received?
A: According to Mary Anne Boyker of the IRS in Customer Service, ID3103130, "...for Sole proprietors, because of how the income flow works, they are deemed to have received their entire income as of the last day of the year. So if the Solo 401k plan is setup in December, then they can still defer based on December 31st as being the date they earned it all..." The IRS toll free number is 877-829-5500.
Q: What does that mean?
A: It means that if you are a Sole Proprietor and you set up your 401k plan before December 31st, you can still add the maximum employee salary deferral amount ($14,000 in 2005) even if you didn't actually receive any income between the date the plan is established and December 31st...(as long as you received at least that much that year).
Since employer profit sharing contributions can be made after year end based on the entire year's income (even if the plan was set up, say, in late December)...sole proprietors can fully utilize both components of contribution as long as they set their plan up before the last day of the year..
Q: What happens if I over contribute to my plan?
A: If the contributions made for you during the year exceed the limits, the excess is taxable to you.
Q: Can I make corrective distributions of excess plan contributions? A: To correct over funding, the plan administrator may distribute the excess plan contributions (along with any income earned on the excess). The corrective distributions are reported on Form 1099-R and are still taxable. They cannot be rolled over into another plan, but are not subject to the additional tax on early distributions as follows.

If it is less than $100 and is distributed with income within 2.5 months after the close of the plan year, such excess contributions are taxed in the year of distribution rather than the taxable year in which the first elective contributions were made. [Treas. Reg. 1.401(k)-1(f)(4)(v)(b)].

If excess contributions are distributed more than 2.5 months following the close of the plan year (but before the close of the next plan year) the employer is subject to a 10 percent excise tax [Treas Reg. 1.401-1(f)(6)(i)].

If excess contributions are not distributed within 12 months following the close of the plan year, the plan is subject to disqualification. [Treas Reg. 1.401-1(f)(6)(ii)].
Q: What about loans from my 401k plan?
A: Loans are available up to 50% of the account balance not to exceed $50,000. The interest rate is a commercially reasonable rate. Rates considered reasonable by the Department of Labor range from a certificate of deposit rate plus 2% to the prime rate plus 1%. The rate is fixed and fully amortized. (Under our 401k program, you can have no more than two loans outstanding at any one time.) General purpose loans have a 5 year repayment period while loans for the acquisition of a primary residence can have a longer repayment period. A plan loan must be repaid within five years unless the loan is used, within a reasonable period of time, to acquire a principal residence of the participant.
A so-called principal residence loan need not be secured by the participant's principal residence to satisfy the requirements. (A refinancing generally cannot qualify as a principal residence plan loan. Refinancing, second homes and investment property have 5 year repayment terms.) However, a loan from a plan used to repay a loan from a third party will qualify as a principal residence loan [Treas. Reg. 1.72(p)-1.]
There is no clear guidance as to what level of proof is required before an employer can extend the five year term. A very conservative approach would be to issue the check jointly to the participant and the seller of the property, or alternatively, to an escrow agent who can disburse only upon the closing. A more liberal and less cumbersome approach is to rely on a signed statement from the participant that the loan proceeds will be used to purchase a principal residence within a stated short period of time, The plan administrator could also require a copy of the purchase contract.
Q: Is the consent of my spouse required to take out a loan from my 401k?
A: For plan loans over $5,000 (from plans which are subject to the spousal annuity requirements), the spouse must give written consent within 90 days prior to the date the loan is made. Treas. Reg. 1.401(a)-20, Q&A 24(a) (1).
Q: How do I actually request a loan?
You need to link a bank account to your 401k at www.vanguard.com to receive the proceeds of a loan and for automatic repayment. (New online bank links have to mature for ten calendar days as do new funds received at Vanguard via check, rollover and transfer.)

After you fund your 401k plan, simply email us and tell us the amount you want to borrow and we will custom prepare a promissory note for you. When you (and your spouse, if any) sign the promissory note and you have your bank account linked and the funds at Vanguard are "seasoned" (at least ten days old), you or us may execute your loan and set up your automatic repayment. Once your loan/redemption is executed, Vanguard electronically transfers to your bank the following day and your bank usually credits you the day after that.
Q: Can you walk me through the loan process step-by step in more detail?
A: In order to obtain your loan and set up your automatic repayments, you will need to link your bank account to your 401k Plan. You can do this online at Vanguard. After you open your account and go into account options, you will see a drop down box with a bank account already listed. That bank account will have the same name as your company, 401k plan or 401k plan sponsor. If you do not have a bank account so entitled, or wish to use a different bank account, you will need to fill out the Money Transfer Options Kit, get your signature guaranteed by your bank and mail the completed form to Vanguard at The Vanguard Group, Small Business Services Dept. 8C1, P.O. Box 1106, Valley Forge, PA 19482-1106.
Vanguard places a 10 calendar day hold on all checks received and a 10 business day waiting period after your bank account is linked for them to “prenote“ the account to verify the account information is accurate.
Once your return the promissory note to us and your bank account is linked to your 401k plan and the account and funds are seasoned (at Vanguard 10 or more days), here is how you can get your loan:
For us to execute the loan for you: You will need to fill out the Limited Agent Authorization and have your signature notarized. Return the completed form to us or Vanguard and we will execute the loan and set up the automatic repayments on your behalf.
You can execute the loan yourself: Call Vanguard at 800-662-2003 and request a redemption in the amount of the promissory note from whichever fund you have sufficient money in. Check with Vanguard to ensure that there are no short-term redemption fees on the fund you are withdrawing the funds from. (You may withdraw from several funds as long as you do not exceed the total amount stated in the promissory note).
Request that the Vanguard representative set up an automatic repayment (in the amount listed on the promissory note) from your linked bank account into only one of your Vanguard funds. Set up the automatic repayments to begin 30 days after the loan is funded and end 60 months (5 years) later (if a 5 year loan-or for however many months is indicated in your promissory note).
Do not execute the loan yourself until you have signed and returned the promissory note we prepared for you and you have set up your bank account link and your automatic repayments. Doing so may result in a "deemed distribution" which will trigger a 1099-R and cause you to be liable for income taxes and penalties on the entire amount of the loan.
Q: How frequently must the 401k loan repayments be made by law?
A: 401k loans require repayments to be made at least quarterly. IRC Section 72(p)(2)(C). If a loan does not call for at least quarterly payments, the entire loan is deemed a distribution at the time the loan is made. Treas. Reg. 1.72(p)-1.
Q: Who do I pay the interest on the loan to?
A: You pay it back into your own 401k account and you keep it.
Q: Is the interest on the loan tax deductible?
A: No. The interest paid is generally nondeductible. (However, if the loan is secured by a participant's principal residence, the interest is deductible as long as the participant is not a key employee. I.R.C. §72(p)(3). Key employees are officers with annual compensation in excess of $130,000, a more than 1% owner with annual compensation in excess of $150,000 or a more than 5% owner).
Q: Is there an additional fee for taking a loan?
A: No.($0 setup and $0 each year the loan remains outstanding).
Q: Does the loan appear on my credit report?
A: No. "The consumer is borrowing his or her own money, and the loans are not reported to the credit-reporting agencies," says David Rubinger, vice-president of communications for Equifax, one of the major credit bureaus.
Q: What if I don't or can't payback the loan?
A: You'll owe income taxes on the money and could get hit with a 10% early withdrawal penalty.
Q: Is the yearly administrative fee assessed on outstanding loan balances?
A: Yes.
Q: When do participant loans become taxable to a participant?
A: Participant loans in 401 (k) plans can generate taxable income to the participant if principal and interest payments are not made on a timely basis. Furthermore, if a participant loan exceeds the Tax Equity and Fiscal Responsibility Act of 1982 [TEFRA) limits (the lesser of 50 percent of the account balance or $50,000 or if it fails to satisfy the requirements of Code Section 72(p) by its terms, immediate taxation can result. [I.R.C. g 72(p)]
Q: If a participant loan becomes taxable, does the obligation to the 401 (k) plan still exist?
A: Yes. From the trustee's perspective, the fact that all or a portion of the loan is taxed to the participant does not remove the participant's obligation to the plan. The participant is still responsible for paying interest on the loan and repaying principal.
Q: May a participant loan ever be converted to a distribution?
A: Yes. If the plan permits withdrawals after age 59½, and the participant is older than age 59½, the outstanding loan may be converted to a distribution and no further obligation to the plan will exist. Similarly, if the loan was taken from an account other than a salary deferral account and in-service withdrawals are permitted from those accounts, foreclosure and distribution can occur. If the loan is still outstanding at the time of retirement or severance of employment, the obligation may be extinguished by reducing the participant's account balance by the outstanding loan. It is important to note that the loan will not be taxed twice. Once the loan is treated as taxable, it represents part of the participant's cost basis [investment in the contract).
Q: How is a taxable loan reported?
A: The amount of the default or the amount in excess of the TEFRA limits is reported on Form 1099R in the year of default or in the year the excess loan is made.
Q: Other than loans, when can I take a distribution of the money in my 401k plan without penalty?
Unlike SEP's and SIMPLE retirement accounts, where funds held for a participant may be withdrawn by the participant at any time, 401k plans are subject to rules that restrict a participant's access to her 401k plan accounts.

All 401k plans may provide that a participant's accounts may be distributed upon retirement, death, disability, or separation from service. [Treas. Reg. Sec. 1.401-1(b)(1)(ii), 1.401(k)-1(d)(1)(ii)]

Whether accounts are accessible in other situations depends on the type of contribution used to fund a particular account. In general, accounts attributable to elective contributions are, under the law, less accessible to participants than accounts funded with other types of employer contributions. According to regulations employer non-elective contributions may be distributed after a fixed number of years, the attainment of a stated age, or upon the occurrence or some event as layoff or illness. [Treas. Reg. 1.401-1(b)(ii)] These regulations apply to a 401k plan that is part of a profit sharing or stock bonus plan.

Amounts attributable to elective contributions may be distributed under the following circumstances:

1) Attainment of age 59.5 (profit sharing or stock bonus plan only).
2) Hardship (a distribution made in response to an immediate and heavy financial need and is is necessary to satisfy that need).
3) Termination of the plan.
4) Sale or other disposition of substantially all (at least 85% of) the assets used by a corporation in a trade or business to an unrelated corporation.
5) Sale or other disposition by a corporation of its interest in a subsidiary to an unrelated individual or entity. [Treas. Reg. 1.401-1(k)(1)(d)(1)(ii), 1.401-1(k)(1)(d)(1)(iii), 1.401-1(k)(1)(d)(1)(iv), 1.401-1(k)(1)(d)(1)(v)].

Under EGTRRA, distributions of elective contributions can be made after December 31, 2001, if there is a severance of employment, which occurs when a participant ceases to employed by a the employer that maintains the plan.
Q: What does the term "normal retirement age" mean?
A: Normal retirement age means the earlier of:

1) The time specified by the 401k plan at which a participant reaches normal retirement age; or

2) The later of :

a) The date a participant reaches 65, or
b) The first day of the plan year in which occurs the fifth anniversary of the date a participant commences participation in the plan. See I.R.C. Section 411 (a)(8); Treas. Reg. 1.411(a)-7(b).

Q: What is the "earliest retirement age"?

A: The earliest retirement age under a 401k plan is the earliest age at which a participant may elect to receive benefits under the plan. In no event, however, may the earliest retirement age be later than the early retirement age determined under the provisions of the plan, or, if there is no early retirement provision, the plan's normal retirement date. See Treas. Reg. 1.401(a)-20, Q&A 17(b).

Q: Who can rollover the proceeds of the 401k?

A: A participant and their surviving spouse can rollover to an IRA, a non-spouse beneficiary cannot rollover to an IRA. I.R.C. §402(c)(9); Treas. Reg. §1.402(c)-2.
Q: I would like to know the tax consequences of the distribution of my 401(k) upon my death if my adult son is designated as the beneficiary. Does he have to take the entire amount as a lump-sum distribution, or can he take the payout over a five-year period? If a trust is designated as the beneficiary, what are the tax rules?
A: Beneficiaries usually may withdraw the entire 401(k) in a lump sum if they choose, says Internal Revenue Service spokesman Jesse Weller according to Arthur M. Louis. If they prefer installments, there are generally minimum amounts that must be withdrawn.
It's extremely important to follow the rules, because there is a 50 percent penalty tax applied to any amount that should be distributed in a given year but isn't.
If you start receiving required, periodic distributions before you die, the distributions to your beneficiary must continue at least as rapidly after you die.
If you have not begun receiving such distributions before your death, your beneficiary will either have to receive distributions of the full account by Dec. 31 of the fifth year following the year you die or receive annual distributions based on the beneficiary's life expectancy.
Any rules spelled out in your 401(k) plan will determine which method the beneficiary may choose. Furthermore, the choice is supposed to be made before the next required distribution -- usually, Dec. 31 of the year following your death.
If your plan doesn't specify which method to follow, and if your designated beneficiary fails to make a choice on time, then the default is the life-expectancy method. (If you don't have a designated beneficiary, the five-year rule applies instead.)
If a trust is your beneficiary, and it meets certain requirements, the beneficiaries of the trust will be treated as beneficiaries of the 401(k) for tax purposes, and the payouts are usually pegged to their life expectancies.
If the trust does not meet the requirements, and you had started receiving distributions, the payments must be made within five years after your death. If payments had not begun, they would have to be made over your remaining life expectancy (even though you are dead!). You should consult your trust attorney if you want to name your trust as beneficiary.

Q: Can I designate my estate or a trust as a beneficiary of my 401k plan?
A: An estate cannot be a designated beneficiary of a 401k plan. [Treas. Reg. 1.401(a) (9)-4 Q&A 3]. A trust itself cannot be a designated beneficiary, but individuals who are beneficiaries of the trust are treated as designated beneficiaries if the trust meets the following requirements:

1. It is valid under state law (or would be valid but for the fact that there is no trust corpus)
2. It is irrevocable, or it will by its terms, become irrevocable on the participant's death;
3. Its beneficiaries are identifiable under the trust instrument; and
4. A copy of the trust instrument or a certified list of beneficiaries is provided to the plan.
[Treas. Reg 1.401(a) (9)-4 Q&A 5].

Q: Can I have a workplace or company 401k and my own Solo 401k plan at the same time?
A: Yes you can. The contributions to your Solo 401k will be based on your self-employment income and not on income earned as an employee of another company. However, the two plans are treated as one for purposes of determining your maximum contribution limits. You may not defer more than $42,000 into both plans combined.
For example, you may not defer the maximum as an employee at work ($14,000 in 2005) and then another $14,000 into your Solo 401k as an employee of your own company. If you defer (contribute) say $6,000 as an employee at work, you can defer (contribute) up to $8,000 as an employee into your Solo 401k (as long as you have earned income from self-employment of at least that amount).
The real advantage comes in on the profit sharing side, where if your employer does not contribute the maximum remaining on your behalf as an employer contribution (over and above the amounts you have deferred as an employee into the plan) you may contribute the maximum remaining (not to exceed $42,000 combined employee and employer contributions) into your Solo 401k plan (if your compensation from self-employment warrants it-roughly 20% of net earned income for Solo Proprietors and 25% of W-2 wages for corporations, see above).
Q: Can I have a Solo 401k plan and a traditional IRA at the same time?
A: Yes you can. However, the two are related in that if you are an active participant in a qualified plan (say, for example, a Solo 401k plan) limits are placed on the amount of a contribution to a traditional IRA that is deductible. For single individuals and heads of households, the part of the contribution to a traditional IRA that is deductible phases out ratably if MAGI is more than $45,000 and less than $55,000 in 2004. In 2005, it phases out ratably if MAGI is more than $50,000 and less than $60,000. However, the amount deductible will be at least $200 if the MAGI is less than the high end of the phase out range.
Q: Can I have a Solo 401k plan and a ROTH IRA at the same time?
A: Yes you can. The two are not related. They each have their own contribution limits and contributing to one does not reduce the contributions you can make to the other. However, the right to make contributions to a ROTH IRA phases out if MAGI exceeds certain specified limits, regardless of whether the individual is an active participant in a qualified plan.
Q: Can I have a SEP-IRA and a Solo 401k plan at the same time?
A: Yes you can but the two plans are treated as one for purposes of determining your maximum contribution limits. Since the Solo 401k allows for greater deductions on less income, having both may not make the most sense. Further, according to Mr. Boldragini ID#31-08350 of the IRS if you want to have both a SEP-IRA and a Solo 401k, you may not contribute to both in a given tax year unless you used a plan document other than the IRS model document for the SEP-IRA (i.e. IRS Form "5305-SEP"). You must have used a prototype plan document or an individually designed plan document for the SEP-IRA, which allows for multiple plans and apportionment and aggregation of contributions. However, you do not need to terminate the SEP-IRA in order to open or maintain a Solo 401k, (you simply cannot contribute to the SEP-IRA in the same tax year as your contributions to a Solo 401k). You can keep an existing SEP-IRA dormant (no contributions) alongside a Solo 401k. (This true even if the dormant SEP-IRA is the IRS model document for the SEP-IRA (i.e. IRS Form "5305-SEP").
Q: Can I have a SIMPLE-IRA and a Solo 401k plan at the same time?
A: No you may not. Because SIMPLE plans often have exclusive plan rules, they are generally not allowed alongside a Solo 401k. However, you can easily terminate your SIMPLE plan and start and contribute to a Solo 401k for this year. Here's how the IRS says to terminate the SIMPLE...
http://www.irs.gov/retirement/article/0,,id=118528,00.html

Q: Can I roll a SIMPLE-IRA into a Solo 401k plan?

A: IRS Publication 590, a copy of which you can obtain here, says on page 100:
"After the two year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax sheltered annuity plan (Section 403(b), or deferred compensation plan of a state or local government." (emphasis added). Since a Solo 401k plan is a "qualified plan", so yes you can roll a SIMPLE IRA into a SOLO 401k after two years.

Q: Is an IRA subject to the distribution rules provided in section 401(a)(9) for qualified plans?
A: (a) Yes, an IRA is subject to the required minimum distribution rules provided in section 401(a)(9). In order to satisfy section 401(a)(9) for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2003, the rules of Sec. Sec. 1.401(a)(9)-1 through 1.401(a)(9)-9 and 1.401(a)(9)-6 for defined contribution plans must be applied, except as otherwise provided in this section.
Q: Is the required minimum distribution from one IRA of an owner permitted to be distributed from another IRA in order to satisfy section 401(a)(9)?
A: Yes, the required minimum distribution must be calculated separately for each IRA. The separately calculated amounts may then be totaled and the total distribution taken from any one or more of the individual's IRAs under the rules set forth in this A-9.
Generally, only amounts in IRAs that an individual holds as the IRA owner may be aggregated. However, amounts in IRAs that an individual holds as a beneficiary of the same decedent and which are being distributed under the life expectancy rule in section 401(a)(9)(B)(iii) or (iv) may be aggregated, but such amounts may not be aggregated with amounts held in IRAs that the individual holds as the IRA owner or as the beneficiary of another decedent. Distributions from section 403(b) contracts or accounts will not satisfy the distribution requirements from IRAs, nor will distributions from IRAs satisfy the distribution requirements from section 403(b) contracts or accounts. Distributions from Roth IRAs (defined in section 408A) will not satisfy the distribution requirements applicable to IRAs or section 403(b) accounts or contracts and distributions from IRAs or section 403(b) contracts or accounts will not satisfy the distribution requirements from Roth IRAs.
Q: I currently have a money purchase pension plan that does not allow you to borrow against your balance. I would like to start a new 401K that does allow loans and roll the money from the money purchase pension into it so I will have two retirement funds. Please let me know if this is possible.

A: To satisfy IRC Section 401(a), the assets and liabilities transferred from Plan A to Plan B must remain subject to the restrictions on distributions applicable to a qualified money purchase pension plan. In order to remain qualified, any plan provision applicable to the accrued benefits derived from Plan A must not permit distributions prior to retirement, death, disability, severance of employment, or termination of the plan.
Money Purchase plans have the same deduction limitations as the profit sharing portion of 401k plans, so in most cases there is no need for an employer to maintain both plans to achieve its retirement plan objectives. As a result, many employers either terminate their money purchase plans or merge them into their 401k plans. So, yes, you can merge the two, but you need to keep the money purchase money in a separate 401k account, subject to the joint and survivor rules, inside of your 401k.

In-service distributions, available under 401k plan would not be available to the money inside the money purchase separate 401k. Rev. Rul. 94-76 provides that, under § 414(l), the transfer of assets and liabilities from a money purchase pension plan to a profit-sharing plan is considered a spinoff of those assets and liabilities from the money purchase pension plan and a merger of those assets and liabilities with the assets and liabilities of the profit-sharing plan. The merger does not divest the assets and liabilities of the money purchase pension plan of their attributes as money purchase pension plan assets and liabilities. The holding in Rev. Rul. 94-76 is applicable when an employer converts a money purchase pension plan into a profit-sharing plan.

If you have employees there are other issues such as vesting, notice, reduction of benefits etc. to address. Click here for an article by Attorneys Weiser and Neis. and Click here to read Rev. Rul. 94-76 on Rollovers from Money Purchase Plans.A: If an eligible retirement plan separately accounts for amounts attributable to rollover
contributions to the plan, are distributions of those amounts subject to the restrictions on
permissible timing that apply, under the applicable requirements of the Internal Revenue
Code, to distributions of other amounts from the plan? Rev. Rul. 2004-12
A: Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of
2001 ("EGTRRA"), Pub. L.107-16, certain restrictions applied to rollovers by individuals of
funds accumulated in retirement plans maintained by their employers or in IRAs
maintained by the individuals. Sections 641 through 643 of EGTRRA (as amended by
§ 411 of the Job Creation and Worker Assistance Act of 2002, Pub. L. 107-147)
substantially increased the rollover opportunities available to individuals, by expanding
both the types of plans eligible to accept rollovers and the types of funds that can be rolled
over. Rules applicable to rollovers (including the new portability rules) are contained in the
following sections of the Code:(1) Section 402(c) provides that if any amount paid from a qualified trust in an
eligible rollover distribution is transferred to an eligible retirement plan in a rollover that
meets the requirements of that section, the amount transferred is not includible in gross
income for the taxable year in which paid. Similar rules apply to § 403(a) annuity plans,
§ 403(b) tax-sheltered annuities, IRAs and § 457 eligible governmental plans.
(2) Section 402(c)(2) provides that the portion of an eligible rollover distribution that
would otherwise not be includible in gross income cannot be rolled over unless such
previously taxed amounts are transferred either (i) in a direct trustee-to-trustee transfer to
a defined contribution plan qualified under § 401(a) that agrees to separately account for
such amounts or (ii) to an IRA.
(3) Section 401(a)(31) requires that a qualified trust provide for the direct trustee to-
trustee transfer (a "direct rollover") of eligible rollover distributions. In the case of
previously taxed amounts, the limitations described in the preceding paragraph apply.
Similar rules apply to § 403(a) annuity plans, § 403(b) tax-sheltered annuities and § 457
eligible governmental plans. (See §§ 403(a)(5), 403(b)(10) and 457(d)(1)(C).)
(4) Section 408(d)(3)(A) provides that previously taxed amounts distributed from an
IRA may only be rolled over to another IRA.
(5) Section 402(c)(10) provides that a § 457 eligible governmental plan may not
accept a rollover from another type of eligible retirement plan unless it separately accounts
for such rollover. Section 72(t)(9) provides that a distribution from such separate account
is subject to the 10-percent additional tax under § 72(t) as if the distribution were from a
plan described in § 401(a).
(6) Section 402(f) requires that the recipient of an eligible rollover distribution be
apprised of the fact that, if the distribution is rolled over to an eligible retirement plan,
distributions from such eligible retirement plan may be subject to restrictions and tax
consequences that are different from those applicable to distributions from the plan making
the eligible rollover distribution. (See § 402(f)(1)(E).)
Distribution Rules Applicable to RolloversIn many instances, the Code, or Income Tax Regulations or other guidance issued
by the Service, provides explicitly for the treatment of rollover contributions. For example,
the survivor annuity requirements of §§ 401(a)(11) and 417 apply to all "benefits provided
under a plan, including benefits attributable to rollover contributions" (§ 1.401(a)-20, Q&A-
11). Similarly, pursuant to § 411(a)(11)(D), in determining whether an employee's accrued
benefit exceeds $5,000 (and thus may not be immediately distributed without the consent
of the employee), a plan may provide that rollover contributions (and attributable earnings)
are disregarded.
In other instances, rollovers are implicitly included. For example, § 72(t) imposes a
10-percent additional tax on a taxpayer who receives “any amount” from a qualified
retirement plan (within the meaning of § 4974(c)) except as otherwise provided in § 72(t);
the reference to “any amount” and the lack of an exception for amounts attributable to
rollover contributions indicate that § 72(t) is applied without regard to whether the amounts
distributed are attributable to rollover contributions.
Q: What if I own part of another company that has employees yet I also earn self-employment income in my own company. Am I still eligible for a Solo 401k and do I need to offer the employees of the other company (of which I am a part owner) the opportunity to participate in my Solo 401k?

A:. If you (and your spouse, if any, together) own less than 50.01% of the other company (the one with employees) then the two companies are treated as separate employers and can maintain separate retirement plans. In other words, you can have a Solo 401k and need not worry about offering it to the employees of the other company of which you are only a part owner (the one with employees)...It is where you (or you and a spouse) own 50.01% or more of another company, that the two companies are treated as one employer and you lose your ability to have a Solo 401k... (The company with employees can always sponsor a company 401k...)

Q: What is a Safe Harbor 401k Plan?

Only If you have employees may you need a Safe Harbor 401k plan. You may need such a plan if the owners (individuals with more than 5% ownership) and the highly compensated employees (HCE's) (employees making more than $95,000 per year) put in a disproportionate amount of money into the 401k plan compared to the non-owner employees and the non-highly compensated employees (NHCE's).
You can achieve a Safe Harbor plan by making employer contributions on behalf of all non-highly compensated employees. (Under a Safe Harbor plan, 100% of all employer contributions are immediately vested).

To satisfy the Safe Harbor rules, you may elect to provide either of the following contributions:

1) A dollar for dollar match on elective contributions up to 3% of compensation and 50 cents on the dollar match on elective contributions between 3 percent and 5 percent of compensation (the basic matching formula). (This is for all eligible and participating employees who are actually contributing.)

2) A 3 percent of compensation non elective contribution. (This is for all "eligible" employees (participating or not...contributing or not).
To remain exempt from ACP testing, all matching contributions must be allocated on a nondiscriminatory basis. Placing an allocation restriction, such as a last-day rule or a 1,000 hours-of-service requirement, on any matching contribution provided by the plan is discriminatory unless all non-highly compensated participants satisfy the restrictions.
Under the original safe harbor plan rules, the only short plan year allowed for safe-harbor plans was the first plan year. Unless an employer organization was in existence less than three months, the first plan year had to be at least three months long. The Final Regulations have added additional opportunities to use a short-plan year (a plan year of less than 12 months) for safe-harbor plans.

Q: What is an "eligible" employee?

An employee is not considered an eligible employee if, upon beginning employment or upon first becoming eligible to participate in the plan, an employee makes a one-time election not to participate in the plan or any other 401k plan maintained (presently or in the future) by the Employer (Treas. Reg. 1.401(k)-1(g)(4)).

Otherwise, employees are considered eligible if they are directly or indirectly eligible to make elective contributions under the 401k plan for all or any portion of the plan year. (Meaning they work more than 1,000 hours per year and are not covered by a collective bargaining agreement (union members) and are over the age of 21.
Your 401k plan can exclude any part time employees (less than 1,000 hours per year or those that are covered by collective bargaining (union members) or those under the age of 21.) Otherwise, you must offer 401k participation to all employees who work more than 1,000 hours per year and are not covered by a collective bargaining agreement (union members) and are over the age of 21.
Nevertheless, otherwise eligible employees can make a one-time election not to participate in the plan or any other 401k plan maintained (presently or in the future) by the Employer and will become non-eligible and you will not need to contribute on their behalf...
Q: What is a principal owner?
A: A principal owner is an individual who owns 5% or more of the parent organization. [Treas. Reg. Section 1.414(c)-3(d)(2), 1.1563-2(b)(2)(ii)]
Q: What is a Highly Compensated Employee (HCE)?
A: A highly compensated employee (HCE) is a individual with more than 5% ownership or employees employees making more than $95,000 per year (in 2005).
Q: What are the minimum coverage rules?
A: The minimum coverage rules require employers to make a 401kPlan available to a cross section of employees. Plans that automatically satisfy the minimum coverage rules include a plan maintained by an employer that has no non-highly compensated employees at any time during the plan year. [Treas. Reg. Section 1.410(b)-2(b)(5).
Q: What is the ratio percentage test?
A: The ratio percentage test requires that the percentage of NHCE's benefiting under the plan be at least 70 percent of the percentage of HCE's benefiting under the plan. [Treas. Reg. Section 1.410(b)-2(b)(2)].
Q: What is the average benefits test?
A: The average benefits test consists of two separate tests, both of which must be satisfied. The two tests are the non-discriminatory classification test and the average benefit percentage test. [Treas. Reg. Section 1.410(b)-4(a)].
Q: What is the non-discriminatory classification test?
A: The non-discriminatory classification test requires the 401k plan to benefit a class of employees established by the employer that is both reasonable and non-discriminatory. [Treas. Reg. Section 1.410(b)-4(a)].
Q: What is the average benefit percentage test?
A: The average benefit percentage test is one that requires the average benefit percentage of the 401k plan for the plan year to be at least 70%. [Treas. Reg. Section 1.410(b)-5(a)].
Q: How is the average benefit percentage calculated?
A: The average benefit percentage is determined by dividing the actual benefit percentage of the NHCE's in plans in the testing group for the testing period by the actual benefit percentage of the HCE's in the plans in the testing group for the testing period. [Treas. Reg. Section 1.410(b)-5(b)].

Q: Is the actual deferral percentage test (ADP) done on an annual basis (once at the end of the year) or some other time frame?

A: The plan must be tested on a yearly basis.

Q: Is the actual deferral percentage test amount based on a percentage or a dollar amount?

A: The amount of elective (deferral) contributions under a 401k plan is not considered discriminatory if the plan satisfies the actual deferral percentage (ADP) test. i.e: Elective contributions under a 401k plan will satisfy the ADP test if at least one of the following tests is met:
1: The ADP of the group of eligible HCE's is not more than 125 percent of the eligible NHCE's or
2: THE ADP of the eligible HCE's is not more than 2 percentage points greater than the ADP of the NHCE's and the ADP of the eligible HCE's is not more than 2 times the ADP of the eligible NHCE's.

ADP for NHCE's ADP for HCE's Rule Used
1 2 Times 2
2 4 Plus 2
3 5 Plus 2
4 6 Plus 2
5 7 Plus 2
6 8 Plus 2
7 9 Plus 2
8 10 Times 1.25
9 11.25 Times 1.25
10 12.5 Times 1.25

Example 1: If the ADP of the NHCE's is 1.23%, the ADP of the HCE's can be no greater than 1.23 times 2, or 2.46%.

Example 2: If the ADP of the NHCE's is 7.43%, the ADP of the HCE's can be no greater than 7.43 plus 2 or 9.43%.

Example 3: If the ADP of the NHCE's is 9.87%, the ADP of the HCE's can be no greater than 9.87 times 1.25, or 12.34%

The ADP for a group of eligible employees is the average of the actual deferral ratios of the eligible employees in that group. (Employees are considered eligible if they are directly or indirectly eligible to make elective contributions under the 401k plan for all or any portion of the plan year. (Employees are considered eligible even if their right to make elective contributions has been temporarily suspended on account of a plan loan or distribution, or because of an election not to participate in the plan. However, an employee is not considered an eligible employee if, upon beginning employment or upon first becoming eligible to participate in the plan, an employee makes a onetime election not to participate in the plan or any other 401k plan maintained (whether presently or in the future) by the employer).

The ADP and actual deferral ratios are calculated to the nearest hundredth of a percentage point. [Treas Reg. 1.401(k)-1(g)(1)(i). (The actual deferral ratio of an eligible employee who is an HCE is the amount of his or her elective contributions for the current plan year divided by the eligible employees conpensation for the current plan year)

If the ADP test for a plan year is not satisfied, there are several mechanisms for correcting an ADP test that does not meet the requirements of law. For a plan which involves no mandatory employer contributions, one corrective action would be to distribute the excess contributions and allocable income. Corrective distributions distributed within 2.5 months after the end of the plan year are not subject to the 10% excise tax penalty for distributions made before age 59.5.

Retirement for the Self-Employed: The Solo 401k

2005-04-06T10:05:00.000-07:00

Planning for Retirement: The Solo 401k

By Craig Lewis Gillooly

A “Solo 401k” offers great tax deferral and retirement planning opportunities for the self-employed.

Beginning in 2002, self-employed people can now establish a 401k plan easier and with greater tax deductions than ever before.

If you are self-employed, and do not currently have a 401k plan, you may wish to consider if it is appropriate for you.

Sole proprietors, partnerships, corporations (including S-corporations), LLC’s, and LLP’s may all establish their own 401k. In 2004, with catch up provisions, you can deduct up to $44,000 for each participant, and up to $88,000 together with a spouse. (In 2005, these numbers will increase to $45,000 and $90,000.)

Higher contribution limits than other popular retirement plans. You can contribute more to a Solo 401k on less income than you can to an IRA, a SIMPLE IRA or a SEP-IRA.

Contribution amounts are flexible. If you had a good year, you can put in more, up to the limits. You can always put in less or nothing at all.

Multiple 401k plans. A side business is a prime candidate for a solo 401k. You can still have a 401k at work and open another one for your sideline business (Any E-bay Power Sellers out there?)

Roll over other plans. Once your 401k plan is established, you may roll over other retirement accounts into it.

Loans. You may borrow up to 50% of your account balance (up to a $50,000 loan) and repay it over five years (or over 15 years, if the loan is used to acquire a principal residence). Interest is paid back into your own 401k plan at around prime plus 1%. The interest paid is expressly nondeductible, regardless of the purpose of the loan. (You cannot borrow from a SEP-IRA or IRA, but you can roll a SEP-IRA or IRA into your Solo 401k and then borrow from it.)

Self-Directed brokerage accounts. The plan may include a self-directed brokerage account, allowing maximum investment flexibility.

No tax return. No tax returns for the plan are necessary, as long as assets remain under $100,000. If assets exceed $100,000, a simplified tax return may be filed.

No FICA tax. The employer contribution portion is not subject to FICA (Social Security) or self-employment taxes (but any salary deferral portion is subject to tax).

Extended contribution date. Employer contributions may be made after year-end (by your tax return deadline, including extensions).

What to look for in a Solo 401k:

No load funds. To minimize your long-term expenses, ask whether there are broker commissions or “loads” (upfront or backend commissions) that you must pay. Many Solo 401k plans require you to pay up to 5.75% of your initial investment in a “load” fee.

Low expense ratios. If you are going to be investing in mutual funds, you should know what an “expense ratio” is. It is the percentage of your assets gobbled up by the fund managers to manage the funds. Part of the expense ratio may also be an unnecessary fee called a “12b1 fee” which usually goes to a broker. Expense ratios vary widely and directly impact your return.

You can look up the expense ratio for any fund at http://www.morningstar.com/ and even find lots of funds that have no 12b1 fees. After all, when it comes to saving for retirement, every penny counts. For example, say you have saved $500,000 and your 401(k) is charging you 0.75 percent a year. Over 30 years, assuming an 8 percent return and no additional contributions, an extra 0.25 percentage points in fees or expenses has cut your nest egg by more than $292,000, according to the SEC's Mutual Fund Cost Calculator at http://www.sec.gov/.

Open architecture. Look for a plan with self-directed brokerage account that allows you to invest in stocks, bonds, options, real estate and mutual funds to allow for maximum investment flexibility.

Index Funds. These are designed to track the major stock and bond indexes and usually have lower expense ratios than actively managed funds.

No or low setup fees and annual fees. Several companies currently offer Solo 401k plans. And some 401k brokers will provide you with a free report on the setup fees, annual fees and loan fees of several different Solo 401k plans. Ask for a comparison of the fees of one or more 401k plans.

Low administrative fees. Compare the load fees, administrative fees of one or more Solo 401k plans to make sure you aren’t paying too much for your 401k.

Online Access. Get a Solo 401k plan that allows you to have online access to view and modify your accounts.

Craig Gillooly is an Attorney and Founder of www.401kBrokers.com Through a wholly owned subsidiary, www.401kAdministrators.com, we administer Solo 401k's for the self-employed.

I can be reached by email at craig@401kBrokers.com