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Qualified Plan Possibilities for Self-Employed Individuals:
The 'Uni-K' and Beyond

By: George M. Morrison, Esq. - Email: gmorrison@cbginc.com

The goal with many one-participant plans is to maximize the tax-deductible contributions that can be made. The contribution goal generally outlines the design of the ultimate plan.  In recent years, one-participant 401(k) plans (a.k.a. uni-ks) have become popular.  A one-participant 401(k) generally permits a self-employed person to make 401(k) deferrals (up to $14,000, or $18,000 if age 50) and profit sharing contributions (of up to 25% of compensation).  However, the overall limit is $41,000 (including the $14,000 401(k) amount).   Your deductible contributions under a uni-k, then, depend upon your compensation.  The chart at right illustrates contributions at various income levels.

The chart does not illustrate the $4,000 catch-up.  Thus, if age 50 or more, you can add $4,000 to every column.

If you need assistance in establishing or maintaining a uni-k, we can help (click here for more information).

If your goal exceeds the $41,000, or lesser amount, permitted under a uni-k, you have other options.  In general, there are two types of plans to consider: (i) profit sharing (with or without a 401(k) feature); and (ii) pension.  There are many differences between these types of plans. 

Calculating the maximum deductible contribution is not easy.  There are several limits to monitor and some limits overlap with one another.  The relevant limits are as follows:

• 401(k) contributions to the profit sharing plan cannot exceed the lesser of $14,000 or 100% of earned income (if you are age 50 or more, you can also make a catch-up contribution of $4,000);
• profit sharing contributions cannot exceed the lesser of $41,000 or 25% of earned income (if the profit sharing also includes a 401(k) feature, the $41,000 figure is reduced by the 401(k) contributions, not including the catch-up);
• benefits accrued under the pension plan cannot provide an annual retirement pension (beginning at age 65) of the lesser of 100% of your average annual compensation or $165,000; and
• if both profit sharing and pension plan contributions are made, the total contribution cannot exceed 25% of compensation.

The contribution required to provide the maximum pension benefit depends upon your age when you initiate the pension plan.  If you are age 30, your annual contribution will be approximately $18,000 whereas if you are age 60 your annual contribution will be $160,000.

Designing plans to maximize deductible contributions must consider your age and compensation.  If we assume your earnings exceed $205,000 and your are age 40, the design would be as follows:

• your annual pension contribution maximizing your pension benefit would be approximately $35,000; and
• since 25% of your compensation ($205,000) totals $51,250, you could adopt a profit sharing plan that provided a profit sharing contribution of $16,250;
• since 401(k) deferrals are not subject to the deduction limit, the profit sharing plan could permit 401(k) deferrals of $14,000.

Thus, your total deductible contributions total $65,250.

The chart illustrates the maximum (broken down by plan) at various ages for individuals earning $205,000 or more.  Keep in mind that the relevant age is your age when you start the pension plan.  The contributions to the pension generally will not increase as you age once you start and begin to fund the plan.

If you need help, please contact us.  You can reach David Hanisco (856.667.7818 x 129) or Jeff Becchetti (856.667.7818 x 118) in our marketing department of help.