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The Individual(k) Implementing an Individual(k)

plan is a great strategy that can
New Tax Laws Allow For Simplicity, Low Fees, and High benefit small business owners
Contribution Amounts for Owners-Only 401(k) Plans tremendously in terms of
Tax relief for the one-person business! The Economic Growth and personal and business taxes,
Tax Relief Reconciliation Act of 2001 (EGTRRA) deliveres a great plus it allows you to sock away
retirement plan for businesses that only employ the owner and their more than the traditional
spouse. “Owner only” businesses now have the opportunity to put up methods.
to $46,000 away - fully tax deductible – into a 401(k) plan.
To learn more about the
In the past, most one-person firms ended up using Keogh plans and Individual(k) retirement program,
individual retirement accounts due to contribution limits and high plan read on to our Frequently Asked
expenses. The Individual(k) or Solo(k) plan changes everything; major Questons (FAQ) on the next
tax savings and low costs are now available. page.
It is now possible to defer taxes on $46,000 due to the new tax laws
($51,000 for those age 50+). Here’s how the law works for a one-
person business assuming maximum contributions.
• Salary Deferral Contribution: Employee salary deferral up to
$15,500*
• Profit Sharing Contribution: Employer contribution up to 25% of
the employee/owner compensation. No more than $230,000 of
total earned income can be taken into account.
• Catch-Up Contribution: Employees age 50 and over may defer up
to an additional $5,000.*
• Total Contribution: Combined employee and employee
contribution cannot exceed $46,000 ($51,000 for those age 50
and above) or 100% of compensation.*
* These are the maximums in 2008 for 401(k) plans.
Some additional key benefits of Individual(k) plans are:
• Low annual administrative costs
• Loan provisions available of up to 50% or $50,000,
whichever is less
• 100% immediate vesting
• Rollover of other retirement assets into an Individual(k) is allowed
providing the opportunity to consolidate and simplify your
retirement plans
• Professional management of your assets
• You may defer much, if not all, of any “sideline” income you make!

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be made before the

Individual(k) compensation is currently
Frequently Asked Questions available or paid to an
employee. Income for an
unincorporated business
Do I qualify for an Individual(k) plan if my business is
owner (i.e., a sole proprietor
incorporated?
or partner) is treated as
An Individual(k) plan can be established by both incorporated becoming currently available
and unincorporated businesses (including sole proprietorships, on the last day of the
partnerships and corporations). If your business is business's tax year. Income
incorporated, you must draw a salary or wage (i.e., Form W-2 for an incorporated business
income) to be eligible for an Individual(k) plan. As an owner of owner (i.e., Form W-2 wages)
an incorporated business, you may want to give special is treated as currently
consideration to when you establish your Individual(k) plan, available when paid to the
make your employee salary deferral election and deposit individual.
deferrals (please see later questions on these issues).
What is the deadline to
Are there special requirements if I have ownership in more make an employee salary
than one business? deferral election?
If you have ownership in more than one business, you may If you are the owner of an
have to include all businesses under one business retirement unincorporated business (i.e.,
plan (depending on whether the businesses constitute a sole proprietor or partner),
"controlled group" as defined in the Internal Revenue Code you must generally make a
under section 414). In cases where aggregation is required, an written employee salary
Individual(k) plan may or may not be appropriate depending on deferral election (specifying
whether the business employs common-law employees that the amount of your intended
must be covered under a qualified retirement plan. employee salary deferral) by
no later than the last day of
What is the deadline for establishing an Individual(k) plan? your tax year.
The deadline for establishing an Individual(k) plan is the last day If your business is
of your business's tax year (e.g., December 31 of the calendar incorporated, you must
tax year). However, if your business is incorporated, you may generally make a written
want to establish your Individual(k) plan early in your tax year to employee salary deferral
allow you to make employee salary deferrals based on your election (specifying the
Form W-2 income throughout the year (because you may not amount of your intended
defer on compensation that is paid to you from your corporation employee salary deferral)
before the initial adoption of your Individual(k) plan). before the compensation is
currently available or paid to
Regulations require that an election to defer compensation must you.

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What is the deadline for funding my Individual(k) plan? loans from qualified plans,
The deadline for funding the profit sharing portion of your such as Individual(k) plans,
Individual(k) plan is your business tax return due date, including provided the plan document
extensions. The deadline for depositing employee salary allows for plan loans.
deferrals depends on whether or not your business is However, some financial
incorporated. organizations that elect to
offer Individual(k) plans may
If you are an unincorporated business owner (i.e., a sole be unable to support
proprietor or partner), the deadline for depositing your employee participant loans.
salary deferrals is your business tax return due date, including
extensions. If I am age 50 or older, may I
If your business is incorporated, conservatively, the deadline for take advantage of the new
depositing employee salary deferrals is the earliest date on "catch-up" contribution
which the deferrals can be reasonably segregated from your rules under an Individual(k)
business's general assets, and no later than the 15th business plan?
day of the month following the month in which the deferrals are Yes, Catch-Up contributions
withheld. may apply in an Individual(k)
plan. One of the many tax
From a funding perspective, are Individual(k) plans more perks that came about
flexible than other types of business retirement plans? because of the recent pension
Individual(k) plans are extremely flexible from a funding reform legislation was the
perspective. There are two primary components to an opportunity for individuals who
Individual(k) plan contribution: are age 50 or older to defer
amounts in addition to what is
1. a profit sharing contribution that can range annually normally permitted under a
anywhere from 0 to 25 percent of compensation, and 401(k)-type deferral
2. an employee salary deferral that can range annually arrangement.
anywhere from $0 to the annual maximum deferral limit, For example, for 2008 the
plus catch-up contributions, if eligible. general limit on employee
Individuals who are age 50 or older during the year are eligible salary deferral contributions is
for an additional catch-up contribution. For 2008, the annual $15,500. However, individuals
maximum deferral limit is $15,500, and the catch-up who are age 50 or older
contribution limit is $5,000. during 2008 are actually
permitted to defer an
Can I take a personal loan from an Individual(k) plan? additional $5,000 to 401(k)
plans (for a total deferral of up
Under the changes brought about by pension reform legislation, to $20,500 for 2008) using the
effective January 1, 2002, both incorporated and new catch-up contribution
unincorporated business owners are eligible to take personal

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rules. Since Individual(k) plans are a type of 401(k) plan, they

qualify for these special catch-up contribution rules.

Since Individual(k) plans are designed primarily for owner-

only coverage situations, what types of common-law
employees can generally be excluded from participation in
a qualified retirement plan?
Generally, under federal law you are permitted to exclude the
following types of employees from coverage under a 401(k)
plan, such as an Individual(k) plan:
 employees under age 21,
 employees with less than one year of service,
 employees who work less than 1000 hours per year,
 certain union employees, and
 certain nonresident alien employees.

What is the maximum contribution that may be made to an

Individual(k) plan for one business owner?
For 2008, the maximum contribution that may be made to an
Individual(k) plan on behalf of any one business owner is
$46,000 for business owners under age 50 and $51,000 for
business owners age 50 or older (due to special catch-up
contribution rules). As various federal limits are increased over
the upcoming years, this amount will continue to grow.

To learn more, call CounselAssure at (866) 799-9795.

CounselAssure is a program for LA County Bar Association Members by Retirement Strategies Group
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Insurance offered through RSG Partners Financial & Insurance Services, Inc. Securities offered through
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