FAQs
Solo 401k Plans
What is a 401(k) plan?
A 401(k) is a defined contribution retirement plan that lets employees defer part of their wages into the plan. Employers may also contribute through profit-sharing. Employee deferrals are always 100% vested, and eligibility generally cannot require more than one year of service. Participants age 50+ may be able to make catch-up contributions.
Employee deferrals are not subject to federal income tax at the time of contribution, but FICA and FUTA taxes still apply. The plan typically must be set up by year-end for contributions to be deductible.
Where do 401(k) contributions come from?
A 401(k) can receive two types of contributions:
Employee contributions – amounts withheld from pay.
Employer contributions – which include:
Employer match: based on how much the employee defers.
Profit-sharing: employer-funded contributions not tied to employee deferrals.
For your plan, “profit-sharing” is the accurate term for the employer contribution used to maximize funding.
What is the annual 401(k) limit?
For 2025, total defined contribution plan limits are:
$70,000 if under 50
$77,500 if age 50+ (or 100% of compensation, whichever is lower)
401(k) vs. Profit-Sharing
A profit-sharing plan is funded only by the employer. A 401(k) allows both employee and employer contributions, and employee deferrals are always fully vested.
If I contribute at my day job, can I also contribute through my business?
You can only make one employee deferral per year across all 401(k)s. If you made a partial deferral at your job, you may contribute the remaining allowable amount through your business plan.
Deadline for 401(k) profit-sharing for sole proprietors
Profit-sharing contributions are due when you file your tax return, including extensions—no later than October 15. However, to complete Form 5500 on time, Oakwood Summit needs confirmation of your deposit by October 1.
Employee and employer contribution deadlines for all entity types
For solo 401(k)s, employee deferrals, after-tax contributions, and profit-sharing are all due by your tax filing deadline, including extensions. If contributions are made after year-end, you must follow employee notification rules.
Reporting spouse contributions in a solo 401(k)
If both you and your spouse contribute, we need each person’s deferral and profit-sharing amounts to verify compliance. For Form 5500, contributions are combined. We strongly recommend separate investment accounts, since Oakwood Summit does not provide individual recordkeeping.
What if I combined my 401(k) assets with my spouse’s in one account?
This creates complications. You must track balances separately on your own, and separate accounts make plan administration and termination much easier. We recommend dividing the accounts.
Does the IRS allow 401(k) deferrals up to the tax filing deadline?
Yes—for solo plans. IRS Publication 560 confirms that elective deferrals for owner-employees can be made up to the tax return due date (including extensions). This rule does not apply to plans with non-owner employees (which fall under DOL timing rules).
How does plan restatement work?
We can update your plan document to add features such as loans or after-tax contributions. A restatement replaces the entire plan document to keep it compliant with changes in tax law—something the IRS requires periodically.
Group 401k Plans
Are “employer contribution,” “employer match,” and “profit-sharing” the same thing?
A 401(k) allows for two contribution types: employee contributions and employer contributions. The terms above all refer to employer contributions, but they are not identical:
Employer contribution – A general term for any amount the business contributes and deducts on its tax return.
Employer match – A contribution tied to the employee’s own deferral. The employer matches a percentage of what the employee contributes. This term isn’t accurate for your plan’s annual funding because you’re not using a matching formula, even though many people use it loosely.
Employer profit-sharing – A discretionary contribution not tied to employee deferrals. Often used in high-income years to increase deductions or reward employees. Since your plan only covers you, profit-sharing is the correct description for the employer contribution that funds your maximum allowed amount each year.
What is an ERISA fidelity bond?
An ERISA fidelity bond protects the 401(k) plan against loss due to fraud or dishonesty by anyone who handles plan assets—such as theft, forgery, or embezzlement.
How much coverage is required?
Each person handling plan funds must be bonded for at least 10% of plan assets, with a minimum of $1,000.
Standard maximum coverage is $500,000 per plan, unless an exception applies:
Exceptions:
Plans holding non-qualifying assets (e.g., real estate): Required coverage is the greater of 10% of assets or 100% of the value of those non-qualifying assets.
Plans holding employer stock: Maximum required coverage increases to $1,000,000.
SEP, SIMPLE, IRA, 403b, 457 & Other Plans
What is a SEP?
A SEP (Simplified Employee Pension) is an employer-funded retirement plan set up through SEP-IRAs. It’s designed for self-employed individuals and small businesses that want an easy, low-cost way to save for retirement.
Only the employer contributes—employees cannot make their own deferrals.
Employer contributions are tax-deductible, and employees pay taxes only when they take distributions in retirement.
SEPs are simple to administer and have few reporting requirements.
Contribution amounts can vary year-to-year, making SEPs ideal for businesses with fluctuating income.
Contribution limits: For 2024, employers can contribute up to 25% of an employee’s compensation or $66,000, whichever is lower. Self-employed individuals can contribute to their own SEP using special compensation calculations.
Eligibility: Employees generally qualify if they:
Are at least age 21,
Worked for the employer in 3 of the last 5 years, and
Earned at least $750 during the current year.
The main drawback is that employee deferrals are not allowed, and employers must contribute the same percentage of pay for all eligible employees.
What is a SIMPLE IRA?
A SIMPLE IRA is a tax-advantaged retirement plan for businesses with 100 or fewer employees.
Key features:
Employees can contribute part of their salary on a pre-tax basis.
Employers must contribute by either:
Matching up to 3% of employee pay, or
Making a 2% non-elective contribution for every eligible employee.
Contributions are tax-deductible, and assets grow tax-deferred.
Pros: Low cost, easy to administer, requires employer contributions. Cons: Lower contribution limits compared to 401(k)s, no Roth option, and mandatory employer contributions every year.
What is a 403(b) Plan?
A 403(b) (or tax-sheltered annuity plan) works similarly to a 401(k) but is designed for employees of nonprofits, public schools, churches, and hospitals.
They count toward the same annual additions limits as 401(k)s.
If I also participate in a 403(b) at my job, does that affect my 401(k) contributions for my business?
Yes.
You are allowed only one employee deferral per person per year, shared across both the 403(b) and your business 401(k).
The plans must be combined when calculating your overall 401(k) contribution limits
What is a 457 Plan?
A 457 plan is another type of defined contribution plan commonly offered by government agencies. It works much like a 401(k):
It allows both employee and employer contributions.
Withdrawals generally do not incur early-withdrawal penalties, which is a major advantage.
Potential drawbacks include lower employer match limits, fewer investment choices, higher fees, and the fact that most 457 plans are not ERISA-protected.
Does participating in a 457 affect my 401(k) funding limits?
Typically, no. 457 contributions are separate and do not reduce how much you can contribute to a 401(k) or 403(b).
Combination Rules
Can I combine a SIMPLE IRA with a cash balance plan?
No. You cannot contribute to a SIMPLE IRA in any year you:
Contribute to a defined contribution plan (401(k), profit-sharing, money purchase), or
Earn benefits in a cash balance plan.
Can I combine a 401(k) with a cash balance plan?
Yes.
Employee deferrals are unrestricted.
Employer profit-sharing About 90% of our clients have both plans.
Why does my cash balance plan limit my 401(k) contributions?
Normally, profit-sharing can go up to 25%, but with a cash balance plan:
Typical contribution structure:
Employee deferral (elective)
Profit-sharing
Mandatory cash balance contribution
412e3 Plan
What is a 412e3 plan?
A 412(e)(3) plan, also known as a “fully insured” or “insurance contract” defined benefit plan, is a type of retirement plan designed for small businesses and self-employed individuals.
It is a defined benefit pension plan funded exclusively by life insurance, annuity contracts, or a combination of both from a life insurance company. It is also exempt from typical defined benefit plan actuarial certification and minimum funding requirements if meeting specific IRS criteria.
In essence, 412(e)(3) plans leverage insurance products to deliver substantial tax-deductible contributions and guaranteed retirement benefits for small business owners and self-employed individuals, subject to meeting IRS requirements.
