self-employed er's opening 401(k)

[Guest M.N. Ouellette]

We have had conflicting answers to this question from attorneys and from CPA's:

Can a self-employed person with employees open a 401(k) plan? May the business owner defer, and if so how? Do we define compensation in the document as something other than W-2 wages? This may seem like a simple question, but two or three different authorities have told us two different answers. Thank you for any assistance.

[R. Butler]

Self employed's can definitely sponsor a 401(k). The self employed owner can defer. In most cases we handle the self-employed contributes a flat deferral amount each period, but be careful that the self-employed will have earned income at the end of the year (not an issue in the cases we handle.). Comp. for a self employed is generally defined as "earned income"; it may be already be specified in the plan document regardless of the what is checked in the adoption agreement.

[GBurns]

Can you give any cites or references that show that a self-employer individual can :

1. Sponsor a 401(k) for employee.

2. Can participate in that 401(k).

Like M.N. I have conflicting opinions the majority of which say no and I would like to build a consencus of qualified opinions. I have disregarded those that cannot give any basis for their opinions.

[Tom Poje]

If you can find it, The Pension Acturay, February 1993 had an article on Earned Income Calculations, there are a few paragraphs devoted to

Special Situations: 401(k) Plans

or read Publication 560 from the IRS. there should be enough in there to put you to sleep, but at least answer your question.

For those of us who remember the issues of 'how do yor treat matching contributions' for an indivdual or for partners, etc. ah, those hooror stories.