Individual/Solo 401k

[LCP]

Looks like quite a few of our clients have an opportunity to put this plan in place before year end and really boost their retirement contributions.

Particularly Sole Props. and small partnerships since the opportunity exists even if they have a current plan (ie SIMPLE) as long as no deferrals for 2007 have been made yet.

I am looking at a husband/wife partnership right now.... one question I have is how the wife's 401k at her main employer might affect the situation. She is full time there and only part time in the partnership.

Also wondering about the cheapest route we can go getting documents done.

Any answers or other thoughts?

[Bees Knees]

The only effect the wife's 401(k) at work has is that it limits her elective deferrals through the partnership. Elective deferrals from all 401(k) plans are combined for purposes of the elective deferral limitation.

One thought, however, I'm not sure you can call a two person (husband and wife) 401(k) a solo 401(k). Under the regs, a solo 401(k) is considered to have passed the ADP test and the ACP test, thus allowing the sole proprietor to contribute the maximum elective deferrals. But that is because that one participant is the only participant. If a husband and wife both qualify to participate, it’s no longer a solo 401(k). Although if both contribute the max and have fairly equal wages, it probably would still pass the ADP and ACP test. Then again, since the wife is participating in a 401(k) at work, and thus is not allowed to do the max through the partnership, the husband's elective deferral will be limited under the ADP and ACP tests.

The alternative is to do a safe harbor 401(k) where both would be allowed to do the max elective deferrals without the ADP or ACP test, as long as the employer does the required matching contributions.

[LCP]

The TPA I'm talking to and the Gear-Up seminar I attended last week both are referring to a plan in a husband/wife business as an individual 401k.

Are you saying that by definition the ADP and ACP tests don't apply?

If they do, would it be possible for the husband to elect not to defer in order to pass tests with the wife who can't defer ........... and still take advantage of a large "match"?

[Bees Knees]

Reg. §1.401(k)-2(a)(1)(ii) says if there is no other participants, the sole participant is deemed to have satisfied the ADP test. Reg. §1.401(m)-2(a)(1)(ii) says if there is no other participants, the sole participant is deemed to have satisfied the ACP test.

The question I have is, how can a husband and wife be considered a sole participant, when they are two?

Therefore, your only other option is the safe harbor 401(k), which is mentioned under a different regulation. You can’t confuse the two because they are not the same. Under a safe harbor 401(k), Regulation Section 1.401(k)-3 says the ADP and ACP tests are considered satisfied as long as the plan meets the safe harbor rules. A safe harbor 401(k) plan can have multiple participants, but it has to have mandatory matching contributions by the employer.

So for your husband and wife plan, as long as it is set up as a safe harbor 401(k) and all the employer matching rules are met, then each can elect just about any deferral amount without worrying about limiting the other spouse’s elective deferrals.

[LCP]

BK: Thanks for all the info and effort you are putting into this question.

Here is a link to the TPA's website that might help you understand what I think I am talking about .....

http://www.trasolok.com/whatis.asp

[Bees Knees]

The website clearly states a husband and wife with no employees qualify for a solo 401(k).

I didn’t say I knew for sure. So I went back to the two cited regulations to see exactly what it says:

Reg. §1.401(k)-2(a)(1)(ii) says: “If, for the applicable year for determining the ADP of the NHCEs for a plan year, there are no eligible NHCEs (i.e., all of the eligible employees under the cash or deferred arrangement for the applicable year are HCEs), the arrangement is deemed to satisfy the ADP test for the plan year.”

The other regulation cited for the ACP test has similar language.

So in other words, it does not in fact say just one participant. It applies when all participants are Highly Compensated Employees (HCEs) and there are no Non-Highly Compensated Employees (NHCEs).

A husband and wife operating a business with no employees would both be considered HCEs since they are both more than 5% owners. Thus, a husband and wife can have a solo 401(k).

[LCP]

Thanks once again!!!

How is compensation for purposes of those tests defined in a partnership? Simply net income multiplied by ownership interest?

What if the husband/wife partnership is 95:5 instead of 50:50 ...... would the majority owner be the only HCE? Or does attribution take care of that issue?

If this works, it looks like the husband could defer $15,500; the wife can't defer any and they would split the profit sharing component ........ or would it all go to the husband?

[Bees Knees]

How is compensation for purposes of those tests defined in a partnership? Simply net income multiplied by ownership interest?

Compensation for partners is the net self-employment income allocated to each, minus the ½ SE tax deduction.

That brings up an interesting point. If an LLC does not subject the member’s Line 1 K-1 profits to SE tax, then neither can you use the Line 1 K-1 profits to calculate compensation for qualified retirement plan purposes. A self employed person (including a partner) must use his or her self employment earnings for retirement plan compensation purposes.

What if the husband/wife partnership is 95:5 instead of 50:50 ...... would the majority owner be the only HCE? Or does attribution take care of that issue?

Sorry, I don’t know what kind of ownership percentage makes them an HCE for 401(k) purposes. I think it is 5%, but I’m not sure. TTB, page 13-27 lists three different definitions for HCEs. Two says 5%, another says 10%.

If this works, it looks like the husband could defer $15,500; the wife can't defer any and they would split the profit sharing component ........ or would it all go to the husband?

It basically means with the ADP test and ACP tests satisfied, both are free to defer whatever they want, up to the $15,500 max, without worrying about subjecting the other to one of the tests.

The wife would still be limited by what was contributed to her other job W-2 401(k) plan.