Who is eligible for Indivisual/Solo 401(k) plan?

[jane123]

Individual-k plans are not subject to non-discrimination testing because the plans cover only the business owners. Could it be argued that if the plan could also cover the children of the business owner and still not be subject to the non-discrimination testing?

Thanks in advance for your help.

Jane

[wmyer]

If the plan benefits ONLY hces, you don't need to worry about ACP, ADP, 410(b) etc. Legitimate children are owners by attribution, and therefore they will be HCEs in this case.

[Guest Pensions in Paradise]

But keep in mind that if the plan covers the children, the plan will be required to file a Form 5500.

[K-t-F]

So the mom and pop can defer max and the kids can defer next to nothing ... and will pass non-discrimination? Because of attribution and the fact that the kids will be deemed to be HCEs?

[WDIK]

To jane123: The glib answer to your topic title would be that only an individual is eligible for an individual 401(k) plan. I don't think your issue is about whether or not a "solo" 401(k) could be adopted in the scenario you propose. I think what you are really asking is related to the testing rules that apply to all 401(k) plans. Wymer addressed that issue.

To PATA: I am in agreement with Wymer's statement.

[jane123]

Thanks for the answers.

WDIK, sorry for any confusion by my heading.

I actually wanted to now if a business owner is eligible to adopt an individual-k or Solo 401(k) if the individual’s son will be an eligible participant in the plan. The son is over age 21 and works for more than 1,000 hours per year. From what I understand, the Solo 401 (k) cannot be adopted by the employer, if any one other than the business owner is eligible to participate in the plan. So is the son considered a business owner? Or does the term business owner limit to include the business owner and spouse?

wmyer's anser seem to say yes, the employer can adopt the sole 401(k) if the son is eligible to participate? But I want to be sure as my post seemd to be unclear

[WDIK]

An "individual" 401(k) plan is merely a type of 401(k) plan designed to target a specific market. I assume that such a plan would have language limiting who could adopt such a design, but you would have to refer to the actual document.

There is nothing stopping the business from adopting a prototype 401(k) plan that would cover all eligible employees. A prototype 401(k) plan can also be used to cover a business where the only employee is the owner. For this reason, I'm just not into the so-called "Solo-K" plans.

I believe that Wymer is responding to issues of plan testing in general and not to any plan document issues that might preclude adoption in the scenario you describe.

[austin3515]

To make slightly more clear, there is no such thing as a "solo 401(k)"- that is to say the Code and the regulations do not define such a plan. They do define, for example an ESOP, or a SEP. The only distinguishing characteristic between a solo 401(k) and any other 401(k) is the number of employees covered under the plan. The terms solo-401(k), individual(k) plan, are all marketing names.

[K-t-F]

Austin is absolutly correct, it is simply a marketing term. Still a full fledged 401k and as such should take into account the possibility that a business, while now a one man show, may have employees in the future.

The plan that has a parent as the owner and employs a son or daughter will not have to pass ADP/ACP because all employees are deemed HCEs because of attribution? correct? But since the plan employs the son or daughter it will have to file a 5500... the free pass for the owner only plan does not count... again correct?

[Archimage]

That is correct.

[E as in ERISA]

I think "Solo 401(k)" is a design marketed based on the 404 deduction rules. In the past it would make little (or no) sense for an individual to have a 401(k) plan -- it would have just added an unnecessary layer of administration for those contributions. But now that the 415 percentage limit was removed and 401(k) contributions were removed from the 404 deduction limit, then there is now an opportunity for individuals who previously would have been limited in their contributions by those rules. Now an individual whose 404 25% limit would give him less than the 415 limit of $41,000 in contributions (for 2004) can potentially use up to $13,000 of the 402(g) limit to get him up to that dollar limit.

Adding children may or may not impact these calculations. (If the adult children earn compensation, that should increase the 404 25% limit.)