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Q. What are the eligibility requirements for establishing and contributing to an Individual(k) plan?
Both incorporated and unincorporated businesses (i.e., sole proprietorships and partnerships) may
establish an Individual(k) plan. To be a candidate for the Individual(k) plan, an employer must not
employ any common-law employees who would be eligible to participate in the plan. In addition,
an employer must have earned compensation from the business establishing the Individual(k). For
an unincorporated business, this means net business income; and for an incorporated business, it
means the owner draws a salary or a wage ( i.e., W-2 income).
Q. What is the deadline for establishing an Individual(k) for my 2010 tax year?
If you want to establish an Individual(k) for 2010, you must do so by the last day of your company's
2010 tax year. For companies on a calendar tax year, the deadline for establishing an Individual(k)
for 2010 would be December 31, 2010. For companies on a tax year other than a calendar year, the
deadline would be whatever the last day of your 2010 fiscal tax year is.
Q. Are there any timing considerations associated with signing a salary deferral agreement?
The biggest timing consideration associated with signing a salary deferral agreement is that you
may only defer compensation prospectively. Generally, this means that you cannot defer on
compensation that has already been paid. However, the rules regarding when compensation is considered
paid are different for self-employed individuals and corporate owners. For sole proprietors and partners,
compensation from self-employment is not considered "paid" until the last day of the owner's taxable year.
This is true even in cases where a self-employed person takes a regular "draw", which resembles a paycheck.
This means that self-employed individuals may wait until the last day of their taxable year to sign a salary
deferral agreement without negatively affecting their ability to defer on compensation earned for that year.
Corporate owners, on the other hand, usually receive their compensation throughout the taxable year. Therefore,
any compensation a corporate owner receives before signing a salary deferral agreement, is generally not
eligible to be deferred.
Q. Are there special considerations if I have ownership in more than one business?
If you have ownership in more than one business,
you may have to include all businesses under one business retirement
plan (depending on whether the businesses constitute a "controlled
group" as defined in the Internal Revenue Code under section
414). If all businesses you own must be included for coverage purposes, an Individual(k) plan
may or may not be appropriate depending on whether the other businesses
employ common-law employees that must be covered under a qualified
retirement plan.
Q. What is the deadline for establishing an Individual(k) plan?
The deadline for establishing an Individual(k) plan
is the last day of your business's tax year (e.g., December 31,
2010, if your company is on a calendar tax year). However, if your business is incorporated,
you may want to establish your Individual(k) plan early in your
tax year to allow you to make employee salary deferrals based on
your Form W-2 income throughout the year (because you may not defer
on compensation that is paid to you from your corporation before
the initial adoption of your Individual(k) plan).
Regulations require that an election to defer compensation
must be made before the compensation is currently available or paid
to an employee. Income for an unincorporated business owner (i.e.,
a sole proprietor or partner) is treated as becoming currently available
on the last day of the business's tax year. Income for an incorporated
business owner (i.e., Form W-2 wages) is treated as currently available
when paid to the individual.
Q. What is the deadline to make an employee salary deferral election?
If you are the owner of an unincorporated business
(i.e., sole proprietor or partner), you must generally make a written
employee salary deferral election (specifying the amount of your
intended employee salary deferral) by no later than the last day
of your tax year.
If your business is incorporated, you must generally
make a written employee salary deferral election (specifying the
amount of your intended employee salary deferral) before the compensation
is currently available or paid to you.
Q. What is the deadline for funding my Individual(k) plan?
The deadline for funding the profit sharing portion
of your Individual(k) plan is your business tax return due date,
including extensions. The deadline for depositing employee salary
deferrals depends on whether or not your business is incorporated.
If you are an unincorporated business owner (i.e.,
a sole proprietor or partner), the deadline for depositing your
employee salary deferrals is your business tax return due date,
including extensions. However, if you complete your tax filing before the deadline,
conservatively, you should deposit your salary deferral as soon as possible after you have
filed your taxes, but in no event later than your tax filing deadline plus extensions.
If your business is incorporated, conservatively,
the deadline for depositing employee salary deferrals is the earliest
date on which the deferrals can be reasonably segregated from your
business's general assets, and no later than the 15th business day
of the month following the month in which the deferrals are withheld.
Q. From a funding perspective, are Individual(k) plans more flexible than other types of business retirement plans?
Individual(k) plans are extremely flexible from
a funding perspective. There are two primary components to an Individual(k)
plan contribution:
- a profit sharing contribution that can range
annually anywhere from 0 to 25 percent of compensation, and
- an employee salary deferral that can range annually
anywhere from $0 to the annual maximum deferral limit, plus catch-up contributions, if eligible.
Individuals who are age 50 or older during the year are eligible for an additional catch-up
contribution. For 2010, the annual maximum deferral limit is $16,500, and the catch-up contribution limit is $5,500.
Q. Can I take a personal loan from an Individual(k) plan?
Yes, provided the plan document allows for plan loans. However, some financial
organizations that elect to offer Individual(k) plans may be unable
to support participant loans.
Q. If I am age 50 or older, may I take advantage of the "catch-up" contribution rules under an Individual(k) plan?
A catch-up contribution allows individuals age 50 or older
to defer more than the general 401(k) deferral limit which is $16,500 for 2010. If a person is eligible
to make a catch-up contribution in 2010, they may defer an additional $5,500, for a total deferral of $22,000.
Both 401(k) plan catch-up contribution limits, as well as the general
401(k) plan employee salary deferral limits, may increase annually
for Cost of Living Adjustments (COLA).
Q. Since Individual(k) plans are designed primarily for owner-only coverage situations, what types of common-law employees can generally be excluded from participation in a qualified retirement plan?
Generally, under federal law you are permitted
to exclude the following types of employees from coverage under
an Individual(k) plan:
- employees under age 21,
- employees with less than one year of service,
- employees who work less than 1000 hours per year,
- certain union employees, and
- certain nonresident alien employees.
Q. What is the maximum contribution that may be made to an Individual(k) plan for one business owner?
For 2010, the maximum contribution that may be made
to an Individual(k) plan on behalf of any one business owner is
$49,000 for business owners under age 50 and $54,500 for business
owners age 50 or older (due to special catch-up contribution rules).
As various federal limits are potentially increased annually for Cost of Living Adjustments (COLA),
this amount will continue to grow.
Note: If the plan allows, starting in plan year 2006, the amount treated as an elective
deferral (and catch-up contribution) can be treated as either a Traditonal 401(k) deferral or as a Roth contribution.
©2010 Ascensus, Inc., Brainerd, MN
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