One Person Plan: 401(k) or Profit Sharing

[Guest elem]

An employer with the owner as the only employee would like to add a DC plan. Does it make sense to use a 401(k) plan with a profit sharing feature, or does it make more sense to use just a profit sharing plan?

The company may add employees in the future, and may want to allow employee deferrals. We could use a profit sharing plan now and add a 401(k) feature in the future when needed, but is there any drawback to just designing the plan from the beginning with the 401(k) feature already in the plan?

[Archimage]

It depends on what his objectives are. If he wants to contribute the maximum and his compensation is around $160,000 or less then yes, you would want the 401(k) feature.

[Guest elem]

The maximum deduction/contribution is not currently wanted or needed, but it may be wanted in the future. Why would the 401(K) feature be needed for the maximum contribution? Couldn't you just have a profit sharing plan with a percentage contribution that would get you to the dollar limit?

Is there a drawback to having the 401(k) features, other than the fact that it makes the plan more complicated than it needs to be in the beginning?

[Archimage]

Let's say your client wants to max out and his comp for the year is $100,000. His 404(a) limit is $25,000. Deferrals are no longer counted in the 404(a) limit so he can end up putting a total of $39,000 for 2005. If there is no 401(k) feature then you are limited to the 404(a) limit of $25,000.

[Blinky the 3-eyed Fish]

There is no drawback to just having the 401(k) feature in the plan even if it is not utilized. It may save the client from having to re-draft a document when they do want to use the 401(k) feature, and that in turn will save the client some fees.

[E as in ERISA]

Look up "Solo 401(k) plans"

http://www.sfgate.com/cgi-bin/article.cgi?...L&type=business

[Guest elem]

Thanks all.

[david rigby]

Try searching for "solo" here: http://benefitslink.com/boards/index.php?act=Search&f=