For the purposes of this article, we will refer to this special 401(k) plan as the “small business owner 401(k)”, or SBO 401(k).A common misconception about the SBO 401(k) is that it can be adopted only by sole proprietors.After making the necessary adjustments, Jill determined that her modified net profit was ,045.65.
These employees would be eligible to participate in the plan because they meet the age and service requirements.
Consequently, their eligibility would disqualify your business from being suitable to adopt the SBO 401(k) plan. Some SBO 401(k) products, by definition, require further exclusions.
The result is the less-complex documentation used to establish the plan.
For instance, a 20-page document for the regular 401(k) plan may be reduced to a three-page document for the SBO 401 (k).
The following table outlines the approximate maximum Jill would be able to contribute with each plan for 2018 (note that the 2019 contribution limits are higher).
As mentioned earlier, you may make employee elective-deferral contributions of up to 100% of your compensation but no more than the elective-deferral limit for the year (,5).Make sure that you receive the proper documentation from your financial services provider.The SBO 401(k) plan may be adopted only by businesses in which the only employees eligible to participate in the plan are the business owners.Furthermore, for other retirement plans, the contributions may be limited to only employer contributions or, where salary deferral is allowed, the limit is less than that for the SBO 401(k) plan. Suppose that Jill, a sole proprietor who is under age 50, has a net profit of ,000.Jill wants to adopt a retirement plan for her business, and she would prefer to adopt a plan that allows the highest contribution limit.When added to your salary-deferral contribution of ,500 (as of 2018), this would be ,000.If your business is a sole proprietorship (like Jill’s business) or partnership, then the calculation gets a little more involved.For instance, if you elect to have an age requirement of 21 even though you are only 20, you would be excluding yourself from participating in the plan.Or say you elect zero years of service as a requirement to participate in the plan, but you have five seasonal employees who work fewer than 1,000 hours each year and are over age 21.Therefore, if you have nonowner employees, they must not meet the eligibility requirements you select for the plan, which must remain within the following limitations.Making the wrong eligibility requirements could result in you being excluded from the plan or nonowner employees being eligible to participate in the plan.