Explore the Advantages of Mini 401(k)s

Until recently, 401(k) retirement savings plans were limited to large businesses with several employees. For a physician working alone, or any one-person business, it didn't make much sense to establish a 401(k). But lately, smaller 401(k) plans have popped up that do make sense, due to lower costs plus mutual funds and annuities.

Mini Rewards

A mini 401(k)—also referred to as a uni 401(k), solo 401(k), and individual 401(k)—is a 401(k) aimed at a physician with one or a very small number of employees. Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), it was unusual for a singleemployee company to establish a 401(k) plan. While this pension reform legislation did not explicitly create a new type of business retirement plan, it made a number of positive changes to existing laws governing 401(k) plans. With the changes in place, a different perspective emerged regarding 401(k) plans for physician practices.

Three changes enacted under the EGTRRA compelled small medical owners to reconsider the 401(k) plan: an increase in the maximum allowable elective deferral limit under 402(g); an increase in the 415 limit; and an increase in the maximum deductible contribution limit combined with a change in the manner in which the limit is determined under 404.

Case in Point

Example:

Lance is the owner and sole employee of VEBA Medical and receives annual compensation from VEBA of $30,000. He would like VEBA to establish a retirement plan for 2005 and is considering both a company pay-all profit sharing plan and profit sharing plan with a 401(k) feature. If VEBA establishes a profit sharing plan without a 401(k) feature, the maximum deductible contribution allowed to the plan is $7500, which is 25% of Lance's $30,000 compensation. However, if the plan includes a mini 401(k) feature, Lance could contribute up to $13,000 on a pretax basis in addition to the $7500 contribution. Lance's pretax contributions do not count toward the 25% deduction limit. Furthermore, the total contribution of $20,500 does not exceed Lance's 415 limit of $30,000.

If Lance's goal is to maximize his retirement savings, adding a mini 401(k) feature is more advantageous, as illustrated in the following table:

This example assumes that Lance's sole occupation is running VEBA Medical. If Lance were employed by another company that also maintained a 401 (k) plan (and he is under age 50), his combined 2005 pretax contribution to both plans could not exceed $13,000.

Lance Wallach, CLU, ChFC, CIMC, of Plainview, NY, speaks at more

than 70 national conventions annually and writes for more than 50

national publications. He speaks and writes extensively about voluntary

employees' benefits associations, pension plans, and tax

reduction strategies. He welcomes questions or comments at 516-938-5007, or visit www.vebaplan.com. The information provided herein is not

intended as legal, accounting, financial or any type of advice for any specific individual

or other entity. Contact an appropriate professional for any such advice.