The One-Man (or Woman) 401(k)

Here’s some little-noticed tax information that may have slipped by you: the recently approved federal tax law allows one-person businesses to sock away large sums of money in 401(k) plans starting next year.

Prior to passage of the Economic Growth and Tax Reconciliation Relief Act of 2001, it made little sense for those who were in business for themselves to set up a 401(k) because other plans like Keoghs, Simplified Employee Pensions (SEPs,) Simple plans, and even individual defined-benefit pension plans provided an easier solution to put away tax-deductible dollars.

Now, says Marcy Supovitz, senior managing director of retirement markets at Pioneer Investments, two major tax law modifications have made solo retirement savings plans appealing. First, under the old law, the maximum deductible contribution in a 401(k)–with an employer and employee contribution combined–was 15%. That has now been raised to 25%. Second, and perhaps more important, the method of calculating the deduction limit changes next year as well. Salary deferral contributions no longer count in the 25% limit. “So a 401(k) becomes a very big advantage for that one-person business that wants to put away more for retirement than it can under other types of plans, the most common being SEPs and Keoghs,” Supovitz says.

To help advisors and consumers take advantage of this new tax provision, Supovitz and her team at Pioneer have designed a retirement plan exclusively for businesses that employ only owners and their spouses. It’s called the Uni-K Plan. Uni-K setup kits become available this month, but contributions aren’t being taken until January.

Any business that employs only owners and their spouses–including S corporations, C corporations, partnerships and sole proprietors–can use the Pioneer product. In some cases, the plan can also include part-time employees who work fewer than 1,000 hours per year, Supovitz says.

$100 Gets You a Plan

A sampling of some business owners who should consider the Uni-K includes real estate brokers, freelance writers, graphic artists, lawyers, accountants, and investment advisors themselves. “If investment advisors are in business for themselves and they pay their own Social Security taxes, then certainly they can look at this Uni-K,” Supovitz says.

Some advisors just can’t wait to get their hands on the Uni-K because it’s cheap, costing only $100 per year. It has none of the administrative complexities normally associated with a 401(k) plan. Not to mention the fact that it creates a new market niche for advisors to pursue. While 401(k) plans are typically complex to set up and administer, the complexity essentially disappears for a one-person business. Setup and administration is as easy and affordable as a Keogh account. The business owner will need an approved plan document and, once account assets reach $100,000, will need to file an annual IRS Form 5500 EZ.

“[The Uni-K] meets a segment of the market that wasn’t being met before, and for us it creates another nice market to go after,” says Sean Patton, a financial advisor with Prudential Securities, Inc. in Rochester, New York. Patton says he’s going to rush out and tell his accountant buddies about the Uni-K plan so they can start sending him referrals. “They certainly run across clients on a daily basis that this would be perfect for.”

Patton says as doubts continue over whether Americans will be able to fall back on Social Security in retirement, Uncle Sam has tweaked the tax laws so “folks have the ability to put more dollars away so there’s not that feeling that you have to count on Social Security.”

And there’s certainly no shortage of small business owners to choose from. According to 1997 Census Bureau statistics (the most recent available), nearly three quarters of all U.S. businesses, or 15.4 million firms, are one-person shops.

Bill Sharp, a planner with Con-

servative Financial Services in Farmington, Missouri, whose firm does a lot of small business retirement planning, is also impressed with the opportunities presented by the Uni-K. “This product is affordable, easy, convenient, and will really increase the opportunity” for people to stash more retirement dollars away, he says. “The small business investor has gone after the Simple in a very big way, but compared to the Simple, the Uni-K raises the limit substantially. It’s a plan that’s inexpensive, and is no hassle to maintain the way Pioneer is doing it. I wish it were New Year’s already!”