With the enactment of EGTRRA (The Economic Growth and Tax Relief Reconciliation Act of 2001) for plan years beginning in 2002 or later, it has become advantageous for many employers to adopt a solo 401(k) plan. Also referred to as an individual(k) or uni-k plan, a solo 401(k) plan take advantage of certain changes to contribution limitations:
The allocation limit to an individual participant was increased from 25% to 100% of covered compensation.
The employer's deduction limit was increased from 15% of compensation to 25% of compensation. Plus, employee deferrals are no longer included in calculating the employer's deduction limit.
Employees over the age of 50 can make additional catch-up contributions in excess of the Section 415 limit.
Add to Defined Benefit Plan Contributions
401(k) deferrals can now be made in addition to defined benefit plan contributions.
To illustrate how a single employee employer can attain a greater benefit using a 401(k) plan over a profit sharing plan, let us compare the maximum contribution that can be allocated to both plan types given the following information:
In 2014 the owner is the only employee of the employer, is over the age of 50 and has an annual compensation of $138,000:
Profit Sharing Plan Allocation — Limit is equal to 25% of annual compensation, which is: $138,000 x 25% = $34,500.
401(k) Allocation — Limit is equal to 25% of annual compensation, plus employee deferrals, plus catch-up contributions, which is: ($138,000 x 25%) + $17,500 + $5,000 = $57,500.
The single employer employee is able to put $23,000 more into the single participant 401(k) plan than would be possible with a profit sharing plan.