The self employed 401k also referred to as one-participant 401k plan, solo 401k or Individual 401k is not a new type of plan. A solo 401k is a traditional 401k but for the self-employed. A Solo 401k is subject to the same regulations as any other 401k. The solo 401k was created by congress to easily help the self-employed save for retirement without all the red tape that applies to full-time employer 401k plans.
The self-employed 401k has been available since the passage of ERISA in 1974. However, it wasn’t until the passage of a tax bill known as EGTRRA in 2002, when the annual contribution limits were greatly increased, that the 401k for the self employed catapulted in popularity.
What is more, because of the EGTRRA tax bill employee contributions are not included in the deduction limit calculation. Only the employer contributions are limited to the less than or equal to 25% of the employees’ compensation. The employee contributions can be made on top of the employer contributions (profit sharing contributions).
Under previous regulations, the employer profit-sharing and matching contributions were combined with the employee deferral when determining the maximum deduction limit of 25% of employee’s compensation, thus reducing the maximum annual contribution amount.