One Participant Retirement Plan Frequently Asked Questions
Many are unfamiliar with the term “One Participant Retirement Plan.” We address a few of your Frequently Asked Questions here.
What is a One Participant Retirement Plan?
The IRS created the One Participant Retirement Plan, or a Solo 401k, specifically for the self-employed and small business owners with no full-time employees. The IRS defines full time as working over 1000 hours per year.
The One Participant Retirement Plan is a cost-effective way for the self-employed to accelerate their retirement savings. Any type of business qualifies as long as it represents the individual’s self-employment. A corporation, a limited liability company, a partnership, a sole proprietorship, etc. can potentially adopt the plan.
What are the tax filing requirements for a One Participant Plan?
Generally, there are no tax filing requirements if the plan balance is less than $250,000. If plan balance is $250,000 and above, you must file IRS Form 5500 EZ on behalf of the plan. As plan administrator, you must file this 2-page informational form with the IRS. The deadline is July 31st for the prior calendar year if the plan year end is December 31st.
You may also need to file additional forms, depending on the activity of your self-directed plan. If you took a distribution from the plan, you would also need to file IRS Form 1099-R for the distribution.
What are the contributions limits for the Plan?
The Plan has two contribution components: the Employee/Salary Deferral and the Employer/Profit Sharing. The combined limit for both is $51,000 for 2013.
The Employee/Salary Deferral contribution limit is $17,500. Participants age 50 years old and above can make an additional “catch up” contribution of $5,500.
The Employer/Profit Sharing contribution is calculated as a percentage of the participant’s compensation. Depending on the business structure, this contribution can be up to 20 or 25% of the compensation.
Both spouses can participate and contribute to the plan if both spouses are employed by and receive compensation from the business.
What is the deadline for making contributions?
The type of business and the type of contribution determine the deadlines.
Corporations (S-corp, C-corp, or LLCs with a corporation election) must run the Employee/Salary Deferral contributions through payroll. Because the Employee/Salary Deferral contribution is deducted from the employee paycheck, this type of contribution typically occurs before the end of the year. The Employer/Profit Sharing contribution can be made up until the tax filing deadline.
Sole proprietors and LLCs can typically make Employee/Salary Deferral and Employer/Profit Sharing contributions up until the tax filing deadline.
Which existing retirement accounts can be transferred into the Plan?
The IRS allows most retirement accounts to be transferred into the Solo 401k with one exception: the Roth IRA.
Existing SIMPLE IRA Plan holders can only establish a Solo 401k in the following year, if they made contributions to the SIMPLE IRA for the current year. IRS regulations do not allow establishing a Solo 401k and making contributions to a SIMPLE IRA during same calendar year.
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