The 401(k) Plan for the Small Business Owner

Prior to 2002, it was impractical for a sole proprietor to adopt a 401(k) plan, as doing so provided marginal benefits, if any, over a profit sharing plan. Additionally, the employer would be saddled with the administrative burden and accompanying cost of maintaining the 401(k) plan. With the advent of The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), your clients falling into the category of “small employers,” including sole proprietors, may want to take another look at the 401(k) plan. These individuals can now make larger contributions to these plans than other small-employer plans.

Prior to EGTRRA, the employer’s maximum deductible contribution included amounts contributed to the plan as employee deferrals. Effective beginning in 2002, EGTRRA changed the definition of compensation for purpose of deduction limits to exclude deferral contribution amounts. This means that employers may now consider larger compensation amounts when determining the maximum amount the employer may contribute and deduct.

Ideal Client Base

This 401(k) plan is ideally suited for the client who wants to aggressively fund his or her retirement account, and is a sole proprietor or small business owner with part-time and/or seasonal employees. Individuals employing family members could reap an even greater benefit if the family members are employed on a full-time basis.

Additional Benefits

Bankruptcy Protection

The opportunity to make larger contribution amounts to the 401(k) plan is just one attraction to the plan. Assets held in qualified retirement plans that meet the requirements of the Employee Retirement Income Security Act (ERISA) of 1974 are usually provided protection against bankruptcy claims. This is not always true for individual retirement accounts (IRAs) and IRA-based employer plans. The levels of protection offered to IRAs vary among the individual states and are further complicated by the type of IRA (for instance, a Roth, Traditional, simplified employment pension plan, or SIMPLE IRA). For a comprehensive list of each state’s bankruptcy information regarding IRAs, visit the Investment Company Institute’s (ICI) web site at


Effective beginning in 2002, the prohibited transaction rules have been modified to permit business owners and shareholder employees to take loans from the qualified plans in which they participate.

The information contained in these materials is believed accurate at the time of writing but is not guaranteed. Delta accepts no responsibility for its use whether in whole or part.