How Do Single(k) Plans Work?

What is a Single(k) Plan?

A Single(k) plan is an employer sponsored retirement plan for owner only entities, meaning you have no full-time employees. These owner only entities get the benefits of having a full fledge 401(k) plan without the large administrative costs associated with traditional 401(k) plans.

What is the definition of a “full-time” employee?

Often times a small company will have some part-time staff. It does not matter whether you consider them “part-time”, the definition of full-time employee is defined by the IRS as working 1000 hours in a 12 month period. If you have a “full-time” employee you would not be eligible to sponsor a Single(k) plan.

Types of Contributions

There are two types of contributions to these plans. Employee deferral contributions and employer profit sharing contributions. The employee deferral piece works like a 401(k) plan. If you are under the age of 50 you can contribute $19,500, in 2021, in employee deferrals. If you are 50 or older, you get the $6,500 catch up contribution so you can contribute $24,000 in employee deferrals.

The reason why these plans are a little different than other employer sponsored plans is the employee deferral piece allows you to put 100% of your compensation into these plans up to those dollar thresholds.

In addition to the employee deferrals, you can also contribute 20% of your net earned income in the form of a profit-sharing contribution. For example, if you make $100,000 in net earned income from self-employment and you are over 50, you could contribute $24,000 in employee deferrals and then you could contribute an additional $20,000 in form of a profit sharing contribution. Making your total pre-tax contribution $44,000.

Establishment Deadline

You have to establish these plans by December 31st. In most cases that plan does not have to be funded by 12/31 but you have to have the plan document signed by 12/31. You normally have until tax filing deadline plus extension to fund the plan.

Loans & Roth Deferrals

Single(k) plans provide all of the benefits to the owner of a full 401(k) plan at a fraction of the cost. You can set up the plan to allow 401(k) loan and Roth deferral contributions.

SEP IRA vs Single(k) Plans

A lot of small business owners find themselves in a position where they are trying to decide between setting up a SEP IRA or a Single(k) plan. One of the big factors, that is often times the deciding factor, is how much the owner intends to contribute to the plan. The SEP IRA limits the business owner to just the 20% of net earned income. Whereas the Single(k) plan allows the 20% of net earned income plus the employee deferral contribution amount. However, if 20% of your net earned income would satisfy your target amount then the SEP IRA may be the right choice.

Advanced Strategy Using A Single(k) Plan

Here is a great tax strategy if you have one spouse that is the primary breadwinner bringing in most of the income and the other has self-employment income for a side business. If the spouse with the self-employment income is over the age of 50 and makes $20,000 in net earned income, they could set up a Single(k) Plan and defer the full $20,000 into their Single(k) plan as employee deferrals. If they had a SEP IRA, the max contribution would have been $4,000.

A huge tax savings for a married couple that is looking to lower their tax liability.

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally , professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, pleas feel free to join in on the discussion or contact me directly.