The federal Employee Retirement Income Security Act (ERISA) of 1974 ushered in sweeping changes in the regulation of pension plans. It established minimum standards for plans in private industry and laying out tax consequences for transactions associated with employee benefit plans. By regulating reporting and disclosure, funding, vesting, and fiduciary duties, ERISA aims at “assuring the equitable character” and “financial soundness” of pension plans. Furthermore, the act contains provisions that affect other benefit plans, such as profit-sharing plans and 401(k) plans. Solo 401k Law allows sponsors of employee benefit plans to delegate investment responsibility to plan participants has become the basis for today’s self-directed Solo 401k plans.
Solo 401k Law: The Beginning
Congress added section 401(k) to the Internal Revenue Code in 1978, allowing employees to defer compensation and the federal tax on it. The Solo 401k law became effective Jan. 1, 1980. However, it was not until Nov. 10 of 1981, that the IRS formally explained the rules for these deferred compensation plans.
Single-Participant 401(k) Plan
One such qualified plan, the “single-participant plan”, is designed for business owners who have no full-time employees other than themselves and their spouse. This traditional 401(k) plan, which covers just one employee, has the same rules and requirements as any other 401(k) plan. The heightened interest in one-participant plans stems from the 2001 Economic Growth and Tax Relief Reconciliation Act (known as EGTRRA). EGTRRA changed how deductions for salary deferral contributions are treated by the IRS. The change encouraged some people to put additional amounts toward their retirement. High Solo 401k Contribution limits is one of the features which attracts much interest to this plan.
Many provisions of EGTRRA had a positive effect on qualified retirement plans. Among the most significant were an increase in the maximum salary deferral amount for 401(k) plans and the ability both to make “catch-up” contributions and to receive a plan allocation.
The regulatory climate for 401(k) plans had begun to change in the late 90’s. In 1996, in an effort to strengthen small businesses, Congress enacted a reforms package that included the Small Business Job Protection Act (SBJPA). In the legislation, Congress encouraged employers to offer 401(k) plans and other retirement plans. The SBJPA simplified nondiscrimination tests and repealed limits on contributions that could be made to a qualified retirement plan by an employee who also was enrolled in a defined benefit pension plan. During this period, the IRS issued a series of rulings encouraging automatic plan enrollment.
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Make Solo 401k Law work for you! Please contact one of our Retirement Account Experts to discuss how you can take advantage of this Ultimate Retirement Plan.