fall 2003 vol.9 no. 2                                                                                                                            Return to Contents
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The One-Person 401 (k) Plan

Craig Hackler, Financial Advisor, Raymond James Financial Services

Did you know that a firm as small as one-person can establish a 401(k)? This is not a new phenomenon. It just never made sense under the old tax law. However, recent changes in the Economic Growth and Tax Relief Reconciliation Act of 2001 have made the 401(k) much more attractive for these small employers.

How attractive? Consider a small business owner at age 50, with $50,000 in income. Assume the business owner would like to contribute as much as possible to a tax-deferred retirement plan during 2002. By adopting a Simple IRA plan, the owner can contribute a maximum of $9,000. By adopting a Profit Sharing Plan, the owner can contribute a maximum $12,500. However, by adopting a 401(k) plan, the owner can contribute up to $24,500 for 2002.

As you can see, the one-person 401(k) plan offers the small business owner the opportunity to make a much larger a contribution to a tax-deferred retirement plan. This strategy even works well for small businesses with certain non-owner employees. Since the contribution amount is entirely discretionary each year this savings strategy is very flexible. Furthermore, contributions are tax-deductible and grow tax-deferred to make this savings strategy very effective.

Additional incentives found in the new tax relief act add to the attractiveness of the one-person 401(k) plan. For example, the new tax relief act provides small business owners with the ability to take a loan from the one-person 401(k) plan. Loans are now available to shareholders, partners, and sole-proprietors on a tax and penalty-free basis as long as the loan amount does not exceed the lesser of 50 percent of the account balance or $50,000.

Finally, there is no IRS Form 5500 filing expense associated with the initial years of the one-person 401(k) plan. The one-person 401(k) plan is not required to file an IRS Form 5500 until the assets in the plan exceed $100,000 or a non-owner employee qualifies for the plan. Therefore, the initial administrative expenses will be minimal.

The one-person 401(k) plan savings strategy is most suitable for firms employing only owners (shareholders, partners, and sole-proprietors) and their spouses. An experienced financial advisor, an ERISA attorney, or a retirement plan administration firm can analyze the suitability of this strategy for your firm.

Texas Paralegal Journal © Copyright 2003 by the Legal Assistants Division, State Bar of Texas.

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