One-Participant 401(k) Plans

One-Participant 401(k) Plans

Is a one-participant 401(k) a new kind of 401(k) plan?

A one-participant 401(k) plan is sometimes called a:

• Solo-k or Solo-401(k)
• Uni-k
• One-participant k

The one-participant 401(k) plan is not a new type of 401(k) plan. It is a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.

Contribution limits in a one-participant 401(k) plan

The business owner wears two hats in a 401(k) plan: employee and employer. Contributions can be made to the plan in both capacities. The owner can contribute both:

• Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit:
  • 2013 and 2014: $17,500 or $23,000 if age 50 or over; and
    
• Employer nonelective contributions up to
  • 25% of compensation as defined by the plan, or
  • for self-employed individuals, see discussion below

Total contributions to a participant’s account, not counting catch-up contributions, cannot exceed $51,000 for 2013 and $52,000 for 2014.

Example: Ben, age 51, earned $50,000 in W-2 wages from his S Corporation in 2013. He deferred $17,500 in regular elective deferrals plus $5,500 in catch-up contributions to the 401(k) plan. His business contributed 25% of his compensation to the plan, $12,500. Total contributions to the plan for 2013 were $35,500. This is the maximum that can be contributed to the plan for Ben for 2013.

A business owner who is also employed by a second company and participating in its 401(k) plan should bear in mind that the limits on elective deferrals are by person, not by plan.

Contribution Limits for Self-Employed Individuals

You must make a special computation to figure the maximum amount of elective deferrals and nonelective contributions you can make for yourself. When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both:

• one-half of your self-employment tax, and
• contributions for yourself.

Use the rate table or worksheets in Chapter 5 of IRS Publication 560, “Retirement Plans for Small Business,” for figuring your allowable contribution rate and tax deduction for your 401(k) plan contributions.

Testing in a one-participant 401(k) plan

A business owner with no common-law employees does not need to perform nondiscrimination testing for the plan, since there are no employees who could have received disparate benefits.

The no-testing advantage vanishes if the employer hires employees. No matter what the 401(k) plan is called by a plan provider, it must meet the rules of the Internal Revenue Code. If employees are hired and they meet the eligibility requirements of the plan and the Code, they must be included in the plan and their elective deferrals will be subject to nondiscrimination testing (unless the 401(k) plan is a safe harbor plan or other plan exempt from testing).

A one-participant 401(k) plan is generally required to file an annual report on Form 5500-SF if it has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement.

Alternatives to a one-participant 401(k) plan

Possible plans for a business owner include:

• SEP
• IRA or Roth IRA
• Other types of plans

Additional Resources

• 401(k) Plans for Small Businesses (Publication 4222) online version (DOL website) or PDF.
  
• Electronic Filing for One-Participant Plans Video (1:47)If you file your one-participant plan return electronically using Form 5500-SF, your electronic return won't be available to the public through the Department of Labor's online search application.

2014 Standard Mileage Rates

2014 Standard Mileage Rates

IR-2013-95, Dec. 6, 2013

WASHINGTON — The Internal Revenue Service today issued the 2014 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2014, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 56 cents per mile for business miles driven
• 23.5 cents per mile driven for medical or moving purposes
• 14 cents per mile driven in service of charitable organizations

The business, medical, and moving expense rates decrease one-half cent from the 2013 rates.  The charitable rate is based on statute.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle.  In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51.  Notice 2013-80 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

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Bartering and trading? Each transaction is taxable to both parties

Bartering and trading? Each transaction is taxable to both parties Sometimes, when the right opportunity presents itself, you may be able to pay for goods and services that you need or want by trading goods that you own, or providing a service that you can perform in return. An example of this is if you own a lawn maintenance company and receive legal services from an attorney and pay for those services by providing an agreed upon amount of mowing and maintenance services at the attorney’s home or place of business. In this scenario, the fair market value of the legal services provided is taxable to you as the lawn maintenance company owner. At the same time, the fair market value of the lawn and maintenance services you provide is taxable to the attorney or his firm. This type of transaction — bartering or trading — can prove to be useful when cash-flow problems would otherwise prevent you from securing needed goods or services. And, while there is no exchange of cash or credit, the fair market value of the goods or services that were exchanged is taxable to both parties and must be claimed as other income on an individual or business income tax return. Remember, just like payments made with money, if a business makes payments of bartered services to another business (except a corporation) of $600 or more in the course of the year, these payments are to be reported on Form 1099-MISC. When considering record-keeping requirements, barter and trade transactions should be treated just like any other financial transaction or exchange. Original cost of goods being bartered or traded, transaction dates, fair market value at the time of the transaction, and other pertinent details should be recorded to assist in the preparation of your income tax return and, in general, held for a period of 3 years in accordance with other documents and receipts used to substantiate income and expenses. For more details on barter and trade transactions, please visit the IRS’s Bartering Tax Center or view the Do You Barter? video. http://www.irs.gov/pub/irs-utl/OC-Barteringandtrading-eachtransactionistaxabletobothpartiesFINAL.pdf

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