401k small business plan
Simply put, a Solo k is a retirement account designed for the self-employed, or business owners with no full-time employees. A Solo or Individual k plan offers many of the same benefits of a traditional k with a few distinct differences. A traditional k is offered by a company allowing employees to save for retirement by contributing to their own accounts directly from their pay. Sometimes the company also contributes to each employee's account.
Top 10 Small Business 401(k) Plan Providers
The k plan has gained in popularity among small business owners ever since when some changes to federal tax law made it a better and more flexible choice for their needs compared to some other retirement savings options. In fact, it now has its own acronym: the SBO k plan.
It's a retirement savings option for small businesses whose only eligible participants in the plan are the business owners and their spouses, if they are employed by the business too.
It can be a smart way for someone who is a sole proprietor or an independent consultant to set aside a decent-sized nest egg for retirement. Not content with the federal acronym, various financial institutions have their own names for the SBO k plan.
The independent k is one of the most generic. Other examples include:. If you are not sure which name your financial service provider uses, ask about the k plan for the small business owner. The IRS provides a handy primer on such plans. A common misconception about the SBO k is that it can be used only by sole proprietors. The only limitation is that the only eligible plan participants are the business owners and their spouses, provided they are employed by the business.
A person who works for one company in which they have no ownership and participates in its k can also establish an SBO k for a small business he or she runs on the side, funding it with earnings from that venture. However, the aggregate annual contributions to both plans cannot collectively exceed the IRS-established maximums. For small business owners who meet certain requirements, most financial institutions that offer retirement plan products have developed truncated versions of the regular k plan for use by business owners who want to adopt the SBO k.
As a result, less complex documentation is needed to establish the plan. A page document for a regular k plan may be reduced to a three-page document for the SBO k. Fees may also be relatively low. As noted above, the SBO k plan may be adopted only by businesses in which the only employees eligible to participate in the plan are the business owners. If your business has non-owner employees who are eligible to participate in the plan, your business may not adopt the SBO k plan.
Therefore, if you have non-owner employees, they must not meet the eligibility requirements you select for the plan, which must remain within the following limitations. You may exclude nonresident aliens who receive no U. Setting the wrong eligibility requirements could result in you being excluded from the plan or non-owner employees being eligible to participate in the plan. 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 k plan. Some SBO k products, by definition, require further exclusions. Before you decide to establish an SBO k plan, be sure to check with your financial services provider regarding its provisions. There are two components to the SBO k plan: employee elective-deferral contributions and profit-sharing contributions. In comparison to other popular retirement plans, the SBO k plan has high contribution limits as outlined above, which is the key component that attracts owners of small businesses.
Some other retirement plans also limit the contributions by employers or set lower limits on salary-deferred contributions. The following is a summary of contribution comparisons for the employer plans generally used by small businesses. If your business is a corporation, the profit-sharing contribution is based on W-2 wages you receive. If your business is a sole proprietorship or partnership, the calculation gets a little more involved.
Check with your tax accountant to take advantage of any applicable extensions. Check the plan document to determine if any other limitations apply. Generally, certain nondiscrimination testing must be performed for k plans. These tests ensure that the business owners and higher-paid employees do not receive an inequitably high amount of contribution when compared to lower-paid employees.
These tests can be very complex and may require the services of an experienced plan administrator, which can be costly.
Because the SBO k plan covers only the business owner, there is no one against whom you can discriminate, so these tests are not required. Earnings of more than that amount are disregarded for plan purposes. If you own more than one business, you must check with your tax professional to determine whether you are eligible to adopt the SBO k. Ownership in another business that covers employees other than the business owner could result in your being ineligible for this type of plan. Internal Revenue Service.
Retirement Savings Accounts. Your Money. Personal Finance. Your Practice. Popular Courses. Retirement Planning K. Table of Contents Expand. A k by Any Other Name.
Is Your Business Eligible? Simpler Documentation. Choose Your Eligibility. The Wrong Requirements. SBO k Plan Components. SBO Contributions vs. Other Plans. The Calculation. Other Benefits of the SBO k. Other Considerations. Key Takeaways An SBO k plan—also called a solo k or self-employed k —is for businesses whose only eligible participants in the plan are its owners and spouses.
These plans are often less complicated and cost less to set up. If you have non-owner employees, they must not meet the eligibility requirements you select for the plan. There are two components to an SBO k plan: employee elective-deferral contributions and profit-sharing contributions. Make sure to receive the proper documentation from your financial services provider. However, most SBO k plans will limit this requirement to one year. While you may generally choose to require fewer than 1, hours under a regular qualified plan, most SBO k plans include a hard-coded limit of 1, hours.
There are a number of other benefits that come with the SBO k. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.
Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. What is the Difference? Partner Links. Related Terms Independent k An Independent k is a tax-advantaged retirement savings plan available to individual small business owners and their spouses. Matching Contribution A matching contribution is a type of contribution an employer chooses to make to his or her employee's employer-sponsored retirement plan.
What is a k Plan? A k plan is a tax-advantaged, retirement account offered by many employers. There are two basic types—traditional and Roth. Profit-Sharing Plan A profit-sharing plan, also known as a deferred profit-sharing plan DPSP , gives employees a share in the profits of a company.
Fidelity can help you design (k) plans for your small business with more than 20 employees. Offer competitive retirement benefits to your employees. However, a small business (k) carries with it not only incredible employee benefits, but also special tax incentives that SMB owners can get.
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The k plan has gained in popularity among small business owners ever since when some changes to federal tax law made it a better and more flexible choice for their needs compared to some other retirement savings options.
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401(k) for Small Businesses
Manage a Business. Small business owners have historically stayed away from offering their employees k plans. Because they believe the administrative costs to be too high and frankly, they see the process as too complicated to get started. Luckily more and more k companies are using technology to provide more cost effective, easier plans to attract smaller businesses and allow them to provide valuable retirement benefits to their staff members. A study by BrightScope found that small businesses are paying k fees at a rate five times higher than large enterprise companies.
A 401(k) Plan for the Small Business Owner
Important legal information about the email you will be sending. By using this service, you agree to input your real email address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an email. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity. Offering a retirement plan is a smart way to help level the professional playing field between your small business and larger companies. A good retirement plan can help you to:. Access to our tools, resources, and experience to help simplify choosing, administering and measuring your k plan. Compare all small-business retirement plans. Looking to tap a k?
With so much to act on and think about just to keep your business in the black, it's easy to shunt aside longer-term planning.
Historically, small employers have steered clear of offering k plans , seeing them as complicated to establish and costly to administer. The rules for running a plan properly are admittedly complex.
