Solo 401k strategies are, by design, one particular participant ideas, intended for company homeowners, associates and spouse and children enterprises without the need of prevalent regulation workers. Besides for Title I of ERISA Solo 401k strategies must operate beneath the exact principles and restrictions as regular 401k designs. Desire in Solo 401k Ideas picked up soon after the passage of Financial Advancement and Tax Reduction Reconciliation Act of 2001 (also recognised as EGTRRA 2001). Prior to the passage of EGTRRA, earlier regulation authorized the most deduction limit of 25 % of compensation for merged employer earnings sharing, match and staff wage deferral contributions to the strategy.
The enactment of EGTRRA took Staff Wage Deferrals out of the deduction calculation.
With the passage of EGTRRA, worker deferrals had been no longer component of the deduction limit calculation. Only the employer contributions ended up confined to up to a deduction limit of 25 p.c of the personnel payment. Personnel deferrals are no lengthier matter to the deduction boundaries of employer contributions. In 2009, that variance is an added $16,500 in income deferrals. Furthermore $5,500 additional for these age 50 and more mature. This change designed an chance for sole proprietors to improve the contributions toward their retirement and cut down the taxes paid to the IRS.
The Solo 401k plan is a no brainer tax and retirement choice for business proprietors who do not have any workers, other than them selves and their husband or wife. However, if the small business grows and the employer hires regular employees, the deduction and contribution pros of the Solo 401k Program can disappear.
If staff members are employed and the new personnel meet up with the eligibility requirements of the strategy, they will have to be authorized to take part. With new staff members, the Solo 401k prepare, with its fast eligibility and 100 per cent vesting can come to be high-priced for modest companies. So do the new requirements for non discrimination testing of employee salary deferrals, employer match and employer income sharing.
And if a strategy is best weighty (the place the key personnel keep a lot more than 60 p.c of the program property) more employer contributions of 3 p.c of compensation will need to be compensated to the accounts of the new staff members.
The system also will come underneath the Fiduciary requirements and the Reporting obligations of Title I of ERISA. And must the new worker choose not to lead to the prepare, the non discrimination regulations reduce the employer from earning any salary deferrals at all. On best of all that the charge of administering the further plan demands will generally triple.
What to Do When You Know You will be Choosing New Workforce.
You know in progress that you will be selecting new staff members. If you will want to keep on the contribution quantities and tax deductions you have been making, there is a temporary and a longer time period answer.
The momentary remedy is to modify the eligibility time period for participation from immediate to 1 yr. The change in services eligibility will only let you to continue creating higher contributions and tax deductions until the conclude of the prepare 12 months in which the new workforce is effective 1000 hrs or 12 months. Immediately after that level in time, you will not be capable to enjoy the tax and retirement advantages until you hire the lengthier answer.
The extended remedy is to amend you Solo 401k program into a Risk-free Harbor Approach.
A Safe Harbor approach presents the adhering to added benefits to businesses:
1. The non discrimination screening is quickly considered to move
2. Employers can add up to the maximum income deferrals limit
3. If a program is prime large the risk-free harbor satisfies the prime weighty contribution necessity
4. Secure Harbor Matching contributions are only provided to staff members who make salary deferrals
The prices of the Risk-free Harbor program consist of more reporting furthermore a 100 % vested Safe Harbor matching contribution of up to 4% of salary deferrals designed by all workers.
A speedy Cost/Benefit analysis need to influence any employer that the very long phrase selection demands critical thing to consider.