Solo 401k Rules

Sometimes called Individual 401k or Solo K, a Solo 401k is a traditional 401k plan for the self –employed with no employees besides that person and his or her spouse.

Solo 401k Contribution Limits

Two contribution types makeup Solo 401k (employee and employer) and the business owner can make both:

Employee Contribution—as much as 100% of earned income

o   2013: $17,500 or $23,000 if age 50 or older

o   2014: Note yet published by the IRS

Employer Contributions—also known as profit sharing

o   2012: This amount cannot exceed $51,000

o   If a business type is Corporation, the maximum is 25% or gross income

o   If business type is Sole Proprietor/Partnership, the maximum is 20% of net income

IMPORTANT: Note that when combined, the two contribution types cannot exceed the annual limit of $51,000 for 2013 plus the $5,500 if you are age 50 or older.

Computing the Maxim Solo 401k Annual Contribution

Use earned income from self-employment business. Net income is net earnings after you deduct the following:

o   One-half of your self-employment tax

o   Contributions made on your behalf

o   Click on Solo 401k Calculator to conveniently calculate both Solo 401k contribution types.

Qualifying for Solo 401k

Only two rules must be satisfied to take advantage of Solo 401k:

o   Generate Self employment activity

o   Have no full-time employees

Self employment constitutes the intention of producing income from services performed with the intention to make significant contributions to the Solo 401k plan.

Business Types that can Open Solo 401k

Any business type can Open Solo 401k, including:

o   Sole Proprietorship

o   Limited Liability Company

o   C and S Corporation

o   Limited Partnership

Part –time Employees may be excluded from Participating in Solo 401k

Solo 401k does is not required to be offered to following types of employees:

o   Those under age 21

o   Those that work less than 1000 hours per year

o   Union employees

o   Nonresident alien employees

Annual Solo 401k testing for nondiscrimination

Since common-law employees do not participate in Solo 401k, annual nondiscrimination testing is not required. However, if the owner-only business hires common-law employees (full time employees besides spouse who adopted Solo 401k), nondiscrimination testing is required and therefore the solo 401k will need to be converted to a safe harbor 401k plan, which your Solo 401k Provider should be able to accommodate.

Annual Solo 401k 5500 EZ Reporting

Only when Solo 401k exceeds $250,000 in value does it have to file Form 5500 EZ.