Approved: The Basics of The One-Participant 401(k) plan Tracking #1-331474
It’s a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.
Contribution limits in a one-participant 401(k) plan
The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:
• Elective deferrals up to 100% of compensation up to the annual contribution limit:
o $17,500 in 2014 or $23,000 in 2014 if age 50 or over; plus
• Employer nonelective contributions up to:
o 25% of compensation as defined by the plan, or
o for self-employed individuals, see discussion below
Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $52,000 for 2014 and $53,000 for 2015.
Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2014. He deferred $17,500 in regular elective deferrals plus $5,500 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2014 were $35,500. This is the maximum that can be contributed to the plan for Ben for 2014.
A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that his limits on elective deferrals are by person, not by plan. He must consider the limit for all elective deferrals he makes during a year.
This article is not a complete discussion of all information necessary prior to making a financial decision. Consult the appropriate professional to discuss your unique situation. Source IRS.gov.
About the Author: Charles Marsala is a Financial Advisor with Benchmark Investment Group with Securities offered through LPL Financial, a member FINRA/SIPC. He can be contacted at Charles.Marsala@lpl.com