The Owners-Only 401k Plan

By Jason Watson, CPA
Posted Saturday, September 28, 2024

The i401k, solo 401k, solo k, uni k, or owners-only 401k (or whatever marketing name a bank or securities firm is selling) is a great small business retirement plan for-

• a one-person show,

• a one-person show with a spouse who also works for the business, or,

• a group of members in a multi-member LLC that does not have any employees. The Economic Growth and Tax Relief Reconciliation Act of 2001 modified the contribution limits and rules, and allowed for an emergence of the owners-only 401k plan.

Due to special tax rules, you can contribute more to this type of plan than other comparable retirement plans. The previous table in the beginning of this chapter illustrated this point with real life numbers. Under the usual rules for defined contribution plans such as SEP IRAs and profit-sharing plans, the deductible contribution is capped at-

• 25% of your salary or 25% of your earned income (as adjusted), or

• $69,000 for the 2024 tax year (plus $7,500 for catch-up) whichever is more restrictive.

But your deferrals as an employee into your solo 401k plan do not count towards the 25% cap, and this rule extends to your spouse. This is why the owner-only or solo 401k plan allows for the largest contribution because you have three sources of funding-

• You at $23,000 (for the 2024 tax year) plus $7,500 for catch-up (employee deferral), and

• Ditto for your spouse, and

• The business contribution up to 25% of your compensation, and

• The funding is independent of each other (deferrals are deferrals, and contributions are contributions).

Read that again. Let’s say you have a $50,000 salary, $39,000 to invest into retirement savings and you are married. If only one person draws a salary, he or she can only defer a maximum of $19,500. But if a married couple pays a $25,000 salary to each person, then the total retirement deferral can be $39,000 without having to increase salaries to allow for a larger business contribution.

With a SEP IRA, in contrast, you would need a 4 x $46,000 or $216,000 salary to make the same retirement contribution (alternative math is $46,000 from the example above divided by 25%). The increase in payroll costs would wipe out your returns for at least two years. Not good. We’ll talk more about why a SEP IRA is used for crisis management and not for self-employed retirement plans (although the recent passage of the SECURE Act makes this moot, but we’ll explain anyway).

Here is an illustrative table showing this concept in a different way from Chapter 10 (Adding Your Spouse to Payroll, page 269) where we show Susan earning $100,000 versus Susan earning $65,000 and Mark earning $35,000.

	Option A		Option B
	Susan		Susan	Mark
Salary	100,000		65,000	35,000
401k Deferral	30,500		30,500	30,500
Business Contribution	25,000		16,250	8,750
Total 401k	55,500		86,000

Deferrals and contributions are discretionary, so you can cut back as cash flow and objectives change. The deadline for funding the business (employer) matching or non-elective contribution to your solo 401k plan is the tax filing deadline for your business including extensions. So, if you are an S Corp, the business tax return (Form 1120S) is due March 15. But with a tax return extension you could delay the funding until September 15. However, sole proprietors have until April 15 (the tax return filing deadline) or October 15 (if you file an extension) to make his or her deposits.

Employee deferrals for corporations (such as an S Corp) must be deposited by the 15th of the following month. So, a March 27 paycheck for Q1 would require you to deposit employee funds by April 15, which is typically a slow day around the WCG office (kidding, we’re celebrating at the local taco bar).

These deadlines are true for all 401k plans (solo, company-sponsored, Roth option, Safe Harbor provision, etc.). However, there is more wiggle room and less scrutiny for when employee deferrals are deposited since discovery is a challenge (in other words, you won’t rat on yourself). To keep things simple and elegant, we recommend following the same schedule as “big person” 401k plans.

As a side note, there is nothing saying you cannot wait until Q4 to make all your deferrals into your 401k plan, or any other quarter where perhaps a little bit of market timing or dollar cost averaging might be beneficial. Being the boss gives you flexibility with your small business retirement options.

Side Note: There is nothing saying you cannot wait until the last few months to make all your deferrals into your 401k plan, or any other quarter where perhaps a little bit of market timing or dollar cost averaging might be beneficial. Being the boss gives you flexibility with your small business retirement options.

Sidebar to the Side Note: Be careful about running out of room on your last few paychecks of the year. If you are paying yourself $60,000 a year or $5,000 a month, your November and December paychecks will be $10,000 and will not have enough room for a one and done $23,000 (for the 2024 tax year) employee 401k deferral. Then again, nothing that a bunch of payroll amendments can’t solve. Yeah, that sounds cheap and easy.

Unlike company-sponsored 401k plans, the individual or solo 401k plan does not need to perform discrimination testing of highly compensated employees (HCEs). More on that in a bit.

Solo 401k plans are also very economical to administer, allow for attractive retirement savings for you and your spouse, and remain simple enough to avoid all the hassles of a full company-sponsored plan. A company-sponsored plan (in contrast to a solo 401k plan) will cost about $1,000 to $1,500 per year (as of October 2024, WCG CPAs & Advisors has 68 team members and our 401k plan with Sure401k, a sister company to SurePayroll, was about $1,800 annually).

However, most solo 401k plans only charge for the commission or sales charge of the investments. For example, if you invest in A share mutual funds, there is a one-time sales load or commission of 5.75% (which might vary a bit between funds and fund classes). On that particular investment there are not any additional commissions, and the account fees are very small or non-existent. A shares (as opposed to C shares) are desirable for long-term investing since the commission paid is a one and done, and this cost is essentially amortized over several years.

The only downside is you cannot have a solo 401k or an owners-only 401k if you have employees. Even one part-time admin might blow this up depending on their hours and years of service (see below).