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Retirement Plan Knowledgebase

Owner-only Retirement Plans

Definition  The law refers to qualified retirement plans for owner-only businesses as "one-participant" plans.  A one-participant plan is defined as a plan which covers:

  • The 100% owner of the business only (or the business owner and his/her spouse)

  • One or more partners in a business partnership (or partner(s) and spouse(s)) in a business partnership

This definition applies to all types of business entities including: C or S Corporations, Sole Proprietorships, Partnerships, LLCs, or LLPs.

Qualified retirement plans for owner-only businesses were historically available in the form of:

  • Stand alone profit sharing plans permitting discretionary contributions from 0 to 15% of compensation;

  • Stand alone money purchase pension plans requiring fixed contributions from 1 to 25% of compensation;

  • Paired money purchase pension and profit sharing plans requiring a fixed contribution of 10% of compensation and permitting discretionary contributions from 0 to 15% of compensation; and

  • Stand alone defined benefit pension plans requiring annual contributions in an amount necessary to satisfy the plan's funding requirement as determined by an enrolled actuary.

However, starting in 2002, the EGTRRA law changed the existing pension rules to:

  • Effectively eliminate the need for a money purchase pension plan by increasing the profit sharing employer deduction limit from 15 to 25%;

  • Increase the individual contribution limit from the lesser of 25% of compensation or $35,000 to the lesser of 100% of compensation or $40,000 (subject to COLA; $49,000 in ‘09);

  • Increase the individual benefit limit from 100% of highest 3-year average compensation limited $140,000 at SSRA (Social Security Retirement Age) to 100% of highest 3-year average compensation limited $160,000 at Normal Retirement Age 62 (subject to COLA; $195,000 in ‘09);

  • Increase the individual compensation limit from $170,000 to $200,000 (subject to COLA; $245,000 in ‘09);

  • Increase the individual contribution limit from $10,500 to $11,000 (subject to COLA; $16,500 in ‘09) which applies toward $40,000 individual contribution limit but no longer applies toward 25% employer deduction limit ; and

  • Permit a $1,000 401(k) "catch-up" contribution limit (subject to COLA; $5,500 in ‘09) for individuals who are age 50 or become age 50 at anytime during the calendar year. The catch-up contribution is over and above the $40,000 individual contribution limit.

One-participant 401(k) Plan  These new rules gave birth to a new plan type, the one-participant (or owner-only) 401(k) plan, and the combination of the one-participant 401(k) plan with a defined benefit pension plan.

In the financial services marketplace, one-participant or owner-only 401(k) plans are referred to by many names.  However, whether the plan is identified as a Mini(k)Plan (Milberg version), Solo(k), Individual(k), Single(k) or Uni(k) plan, all of these "401(k) Plans" are qualified retirement plans (Profit Sharing Plans with a 401(k) feature).

This means that the plan must comply with strict governmental guidelines to retain the plan's "qualified" status.  And, believe it or not, these governmental guidelines are nearly as complex for a plan that provides benefits to an owner-only business as those a company like Microsoft must follow. Failure to follow these rules may subject the plan to "disqualification." Disqualification means that all plan contributions and income on the plan investments may be retroactively taxable, and you loose the ability to rollover the plan assets to an IRA at such time that you retire.

The key question that you must ask yourself is: "Is this plan type appropriate for your situation?"  Meaning, do you desire the higher tax deductible benefit that one gains using one of these plans versus a conventional plan like a SEP or a SIMPLE.

If a SEP or SIMPLE fulfills your needs (from a level of contribution/benefit perspective), you are typically better served using those plan types in that they require minimal formal compliance services. 

Before you select a particular vendor's plan, know the real costs involved and what you really get for what you are really paying. Do not let anyone convince you that these plans are not complex because they are. We routinely represent individuals who have been misled by these vendors who subsequently face issues with the IRS or Department of Labor.  In the end, these individuals pay more to fix their noncompliant plans than they would have had they established and administered it properly.

If you elect to engage our third party administration firm, Milberg Consulting LLC, you are assured that our plans permit you to invest the plan assets in any permissible plan investment through any one or multiple vendors (e.g., banks, mutual funds, discount broker, etc.).  However, these compliance services cost more than many of the low cost providers who serve this market.

You know the old saying: "You get what you pay for."  It really does apply here, so proceed with caution and educate yourself before you buy a low cost plan that requires you alone to comply with the complex rules necessary to maintain your plan's qualified status.

Milberg Consulting LLC (MC) is a third party pension administrator (TPA) focused on the distinct needs of owner-only businesses.  Our nearly 30-year tenure in the design, establishment and administration of these plans, assures our clients that their plans achieve their intended objectives while retaining their qualified status.

Learn more about the specific services provided by Milberg Consulting LLC, or contact Barry R. Milberg at bmilberg@erisaexpertise.com or (800) 965-0988 extension 101.

Learn more about Qualified Retirement Plans for Small Businesses

Learn more about Retirement Plan Design

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