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Find easy to understand Business Information relating to 401(k) plans and from Ubiquity Retirement + Savings. Find easy to understand rules and regulations, along with tips and advice from our team of 401(k) business experts. Call Ubiquity today for a Free Consultation at 855.466.5825.

Whether you’re a small business owner or employee, seeing how much other companies match on their 401(k)s can give you a valuable measure of how generous your own plan is, and help you to adjust your own contributions.

Given the economic uncertainties resulting from the COVID-19 pandemic, many employees may be wondering if company matches will be reduced in 2021, and if so, how this will affect their savings goals for the year.

The good news is that though an estimated 11.5% of small companies suspended or reduced their employer match during the COVID-10 crisis of 2020, most of these employers said they plan to reinstate the matching contributions in 2021. Overall, about 51% of employers who offer a 401(k) also provide matching contributions.

If your employer is increasing their match in 2021, it could be a great opportunity to take advantage of this free money and set more ambitious savings goals. If your employer decreased their match in 2020 and will not be restoring their contributions to previous levels in 2021, you may want to consider increasing your own contributions to make up for the shortfall.

No matter what strategy you choose, investing in a 401(k) plan is one of the best ways to ensure a comfortable retirement. Small business retirement plans that offer employer-matched funds provide a generous incentive to encourage employees to save as much as they can.

Partial 401(k) Matches in 2021

Some employers choose a partial match plan, which means they put in a portion of the amount you put in, based on a set formula, up to a certain amount. The typical partial 401(k) match is 50 cents on the dollar, up to 6% of an employee’s salary. So, for instance, an employee earning $100,000 a year might contribute up to $6,000 and receive $3,000 from the employer in matching funds.

Full 401(k) Matches in 2021

Employers can also choose a plan with a “dollar-for-dollar” match, with the most common being dollar-for-dollar, up to a maximum 5% of an employee’s salary. So, using the same example, the employee earning $100,000 might put in $5,000 as 5% of his salary. The employer would then contribute another $5,000. If the employee put in $2,000, the employer would contribute $2,000. If the employee put in $6,000, the employer would contribute $5,000, as per the policy limit.

Safe Harbor Matching Formulas in 2021

Another type of 401(k) plan, popular particularly among small businesses with a handful of highly compensated employees, is the Safe Harbor plan – which exempts them from annual auditing and nondiscrimination testing, in exchange for agreeing to make generous and fully vested 401(k) contributions to all eligible employees.

The most common formulas for 401k matching contributions are:

  • Basic Match: 100% match on the first 3% put in, plus 50% on the next 3-5% contributed by employees.
  • Enhanced Match: 100% match on the first 4-6% put in.
  • Nonelective Contribution: 3% (or more) of employee compensation, regardless of employee deferrals.

401(k) Limits in 2021

Since 401(k)s are tax-advantaged savings plans, the Internal Revenue Service places an upper limit on what may be contributed by employers and employees each year. The maximum Traditional and Safe Harbor 401(k) limits in 2021 are:

  • $19,500 in employee contributions.
  • $6,500 in additional employee catchup contributions for those over 50.
  • $38,500 in employer funds OR $58,000 (plus $6500 catchup if applicable) in total employer/employee funds.

SIMPLE 401(k) Limits

SIMPLE 401(k) limits are $13,500 for employee contributions. Those over 50 could contribute another $3,000. Employer 401(k) contributions are subject to an employee compensation cap, which is $290,000 for 2021.

Who Is Offering Generous Company 401(k) Matches in 2021?

Some of the more generous plans in 2021 include:

  • CitiGroup – Dollar-for-dollar match up to 6% pay, plus an additional 2% pay regardless of contributions.
  • Southwest – Dollar-for-dollar match up to 9.2% of employee pay.
  • Vimeo – Dollar-for-dollar match up to 10% of employee pay, plus stock options.
  • Walmart – Dollar-for-dollar match up to 6% pay.
  • Qualcomm – 100% match up to the first $1,500; 50% match for the next $1,500; 33% match for the next $7,500; 10% match on any additional contributions up to the IRS limits.

Ubiquity is a leading provider of small business 401(k) plans. We are happy to help you start a new plan, change an existing plan to a different type, or arrange employer matching contributions. When you choose us as your plan administrator, we communicate with employee plan members to ensure they know how to reach contribution limits and maximize their retirement savings. Contact us to set up your affordable and easy 401(k) plan today.

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 was the first major update to retirement plans in more than a decade.

Certain provisions already debuted, but one of the most significant changes — expansion of eligibility to participate in 401(k) plans – went into effect on January 1, 2021. Wondering what these changes are and what they mean for your small business this year? As a leading small business 401(k) administrator, Ubiquity is here to clarify matters.

Who Is Eligible to Participate in 401(k) Plans, Under the SECURE Act?

The 401(k) retirement savings vehicle is no longer just for long-term, full-time employees working more than 1,000 hours. Under Section 112 of the SECURE Act, eligibility expands to workers who:

  • Are at least 21 years old by the last day of the 401(k) plan year,
  • Work part-time for at least 1,000 hours per year (about 20/week) for one year, OR
  • Work part-time for at least 500 hours per year, over the past three consecutive years.

When calculating whether or not an employee has worked “at least 500 hours,” plan sponsors are not required to count before January 1, 2021. So, while you have to start tallying up the hours your part-time workers are putting in starting this year, you may not have to formally enroll these workers into your 401(k) until the 2024 plan year.

The SECURE Act Eligibility Update’s Impact on Nondiscrimination and Top-Heavy Testing

The SECURE Act change will add a layer of administrative complexity, as plan sponsors develop new systems for tracking and reviewing hours for part-time employees over the one to three-year tracking periods.

Sponsors will need to consider whether part-time employees will also be eligible for employer contributions and whether to set a vesting schedule. If a long-term, part-time employee becomes eligible for employer contributions, all years which they have been 18+ and worked at least 500 hours (even before January 1, 2021) must count for vesting.

For employers who are subject to nondiscrimination and top-heavy testing, adding long-term, part-time employees can skew the results. The SECURE Act allows a testing exclusion for employees working 500 hours a year, but employees working 1,000 or more hours in one year must be included. If your plan contains more than 100 participants now, you will require an independent qualified auditors report to accompany your annual Form 5500.

If you are worried about your ability to pass these annual tests, you may want to consider contacting Ubiquity about adding a Safe Harbor provision to your plan for hassle-free administration.

Eligibility Questions to Consider

Plan sponsors may want to consider this short list of questions to ensure they are prepared for the change:

  • Is the hours of service tracking system updated as of January 1 to stay compliant?
  • Have you updated your plan administration documents to note the new eligibility criteria?
  • Do you wish to expand eligibility for matching or non-elective contributions to these employees?
  • Do you need to update new-hire and recruiting materials to ensure plan participation?
  • Will you have more than 100 participants and need to hire an independent plan auditor?

What’s Next?

The House Ways and Means Committee introduced SECURE Act 2.0, otherwise known as the Securing a Strong Retirement Act bill, on October 27, 2020. If passed, this bipartisan bill would, among other things, reduce the 12-month measurement period for long-term, part-time employees from three years to two years. Simply put, don’t plan on making the changes in 2024; prepare your business to increase plan enrollment today.

If you think now is the right time to start your 401(k) retirement savings plan, or have questions about switching providers, call Ubiquity, a leader in setting up and administering low-cost 401(k) plans for small businesses and solopreneurs.

Americans have expressed increased interest in Environmental, Social, and Corporate Governance (ESG) funds over the last decade.

U.S. investors have sunk $17 trillion into assets managed by companies that promote diversity and clean energy. About one-third of all professionally managed assets fit ESG investment rules. Americans invested $21 billion in ESG mutual funds in 2019 – four times the prior record. Despite the economic turmoil, 2020 ESG funds are more than double the records set in 2019. While ESG funds have grown in the last few years, workplace retirement plans have generally not been robust in exploring green investment options.

401(k) Plans and ESG Funds

Workplace-sponsored retirement plans represent a huge pot of wealth. Almost a third of all U.S. retirement assets are held in 401(k) plans. Yet, only 3% of 401(k) plans offer employees an ESG fund investment option. As a result, only a tenth of 1% of 401(k) assets are held in socially responsible funds.

Several roadblocks have prevented these investors from scooping up ESGs:

  • Retirement investment trends

    Target-date funds dominate the workplace retirement plan sphere. The emphasis placed on all-in-one funds that shift from stocks to bonds as investors near retirement are a “safe” default for all employees who are auto-enrolled. One in every $5 invested in 401(k) plans are tied up in such funds – up from one in $10 a decade ago.

  • Possible lawsuits

    Employers are afraid of going out on a limb with investments that could have higher costs or underperform. Companies that pledge adherence to ESG principles will need to live up to their disclosures or find themselves on the receiving end of lawsuits. Even though all but one ESG index fund had higher net returns this year, these lawsuits could potentially jeopardize shareholder profitability, making ESG a riskier type of investment.

  • Trump administration rules

    The Labor Department changes guidance and regulation of ESG funds with every new administration. The Trump administration issued a rule requiring employers to evaluate investments exclusively based on risk and return, rather than taking social responsibility or environmental concerns into consideration. Further, employers were explicitly prohibited from auto-enrolling workers into an ESG fund.

Are Changes Coming in 2021?

Changes are coming in 2021 to alleviate roadblocks for 401(k) investing based on ESG factors. In March 2021, The Biden administration announced that it would not enforce the 2020 Trump administration rule that made it harder to offer ESGs in workplace retirement plans.

Start Your Small Business 401(k) Plan in 2021 With Green Investment Options

For over two decades, Ubiquity Retirement + Savings has pioneered retirement savings plans designed exclusively for small and micro businesses. Since day one, our innovative solutions and low-cost, flat fee pricing make it easier than ever for small businesses to save for their future.

Our customizable 401(k) offerings include an optional turnkey ESG investment lineup, allowing small business owners to empower employees with the opportunity to save for the future while applying their savings toward the causes they care about most.

Just like personal values, investment strategies are not one-size-fits all. Ubiquity’s sustainable investment lineup includes low-cost mutual funds and exchange-traded funds (ETFs) from Vanguard, giving your team a broad range of options based on risk and personal preference.

Offer a 401(k) plan for your team with a fully diversified investment lineup that offers options for green investors.

Learn more about socially responsible investing with Ubiquity

COVID has taken its toll on 401(k) retirement plans, with about 8% of businesses (covering approximately more than 46,000 plans) having cut 401(k) contributions since the start of the pandemic.

While small businesses are more likely to have reduced matching or discretionary contributions as a cost-saving measure, the great majority of companies were able to maintain their retirement contributions in 2020.

Contribution Changes

According to the Plan Sponsor Council of America, more than 1 in 10 small business 401(k)s with fewer than 50 participants have made COVID-19 related changes to their matching contributions within the past year. Organizations with over 5,000 participants were 3x more likely to stay the course.

  • Almost 4 percent of 401(k) plans stopped paying a match to workers entirely.
  • 1.5 percent reduced their match.
  • 1 percent eliminated non-matching contributions.
  • 1.5 percent reduced non-matching contributions.

Though many small business employers have suspended or reduced their contributions this year, more than 90% are still contributing – which is in stark contrast to what happened during the 2008 financial crisis. A September survey by Willis Towers Watson found that most employers that suspended or reduced contributions this year plan to reinstate them by 2021.

Suspending the employer match greatly decreases plan participation and deferral rates, so it’s good that employers are taking advantage of government assistance like the Payroll Protection Program, rather than altering their 401(k)s.

Amending Loan Rules

Plans are not obligated to incorporate aspects of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, but more than half of small business plans are allowing participants to take advantage of relief by:

  • Permitting workers under 59.5 to withdraw funds as (taxable) income, without the 10% penalty.
  • Allowing increased 401(k) plan loan amounts (up to 100% of the balance, rather than the usual 50%).
  • Pausing repayment of existing loans that were due through December 1, 2020.
  • Letting workers defer loan payments for up to one year, and repay gradually over three years.

Initially, there was not much of an increase in plan loans or withdrawals for small businesses early in 2020, but a quarter of small business 401(k) sponsors reported use of the loan feature as 2021 inched nearer. Nearly 40 of plans noted an increase in withdrawals.

Ubiquity Helps Small Businesses Weather the COVID-19 Crisis

Ubiquity is one of America’s leading administrators of 401(k) plans for small businesses, offering affordable flat-fee plans geared specifically toward small enterprises with fewer than 50 employees, independent contractors, and self-employed workers. We are here to answer questions, provide strategic advice, and help you make the most of small business retirement plans. Easy online setup and management allows you to get started saving for retirement without delay or make changes to your plan as needed.

2021 Solo 401(k) Contribution Deadline

Dylan Telerski / 22 Mar 2021 / Business

Self employed woman saving in a solo 401k in 2021

Did you know it’s not too late to set up and make contributions to a Solo 401(k) for 2020?

Previously, in the years prior to 2020, you would’ve had to get your account established by December 31, but the SECURE Act gives solopreneurs until the business tax deadline, April 15, 2021, to sign up for a Solo 401(k) and start saving for retirement. You may also request an extension to the 2020 Solo 401(k) contribution deadline to get even more time to make your contributions for the year.

What Are the Solo 401(k) Deadlines for 2021?

  • Single LLC and C Corps have until April 15, 2022, to set up and contribute to a Solo 401(k) for 2021.
    Please note: If a plan is adopted in 2022 for 2021 you cannot make pre-tax or Roth deferrals, but you can still make after-tax and employer contributions.
  • Partnership LLC and S Corps have until March 15, 2022, to set up and contribute to a Solo 401(k).
  • If you request and receive an extension, you may have until September or October 15, 2022, or until you file your taxes.

What Are the Solo 401(k) Contribution Limits for 2021?

  • As an employee, you may contribute up to 100% of your wages to your Solo 401(k), to the maximum.
  • The maximum Solo 401(k) contribution limit for employees is $19,500 in 2021.
  • If you’re over 50, you may contribute an additional $6,500.
  • As employer, you can reserve up to 25% of the business entity’s income, to the maximum.
  • The maximum limit for total employee/employer contributions is $58,000 in 2021.
  • If your spouse works for the business, the same allowances may be made on his or her behalf.

Should You Explore Solo 401(k) Plans in 2021?

Solo 401(k) plans offer many benefits over other types of retirement savings vehicles – particularly with the high limits of contributing as both “employer” and “employee.” The ability to choose between traditional and Roth plan types is another benefit, allowing you to choose to pay taxes on the amount invested now and enjoy a tax-free retirement, or skip on paying taxes now and allow your money to compound. If you experience financial hardship, you have the freedom to borrow from your Solo 401(k) if necessary – a key difference between a Solo 401(k) and a SEP IRA.

Opening a Solo 401(k) is easy. Online plan administrator Ubiquity will set you up in no time. If desired, you can rollover money from other accounts or set up automatic transfers from your checking, savings, or payroll accounts. If you’re interested in setting up a Solo 401(k), contact Ubiquity to establish a low-cost plan in minutes.

President Joe Biden has proposed changes to 401(k) retirement plan rules that would likely benefit low and middle-income earners. In this blog, Ubiquity breaks down the potential impact of the proposed changes.

Traditional 401(k) Regulations

Traditionally, employees in 2021 could contribute up to $19,500 a year. Employers (or self-employed individuals) could save up to a combined maximum of $58,000. Savers can set aside an additional $6,500 in catch-up contributions if they’re over 50. The amount saved is deducted off income for the year, thus reducing their taxable income.

For instance, a person earning $200,000 a year putting in 10% to a 401(k) would only pay taxes on $180,000. Yet, a person earning $40,000 who contributes the same 10% would be taxed on $36,000. Lower earners would not reap as much in tax savings and are less incentivized to save. Employees who don’t save enough for retirement may work well beyond their most productive years because they have to, which decreases company performance and morale.

Biden’s 401(k) Plan

At this point, there is still much we don’t know. Biden says the plan would “equalize” the incentive system by replacing tax-deductible contributions with a flat tax credit for every dollar saved. The exact amount of the credit is yet-to-be-determined, but the Urban-Brookings Tax Policy Center estimates a 26% credit.

So, under this plan, if a person contributes $100, the IRS will issue a $26 credit. Someone earning $600,000 would get the same tax break as someone making $60,000 – a $260 tax credit for a $1,000 contribution. As a “refundable” credit, employees receive the full refund, even if it’s more than what they owe.

By and large, the plan would benefit lower and middle-income earners more, while high earners may move to Roth 401(k) accounts.

Additional proposals of Biden’s small business retirement plan include:

  • Automatic Enrollment: 

    Under Biden’s plan, almost all workers will be given the opportunity to conveniently save for retirement at work with a 401(k) savings plan.

  • Federal Backing for Multiemployer Defined Benefit Pension Plans: 

    Forthcoming proposals will seek to provide federally backed loans to underfunded multiemployer defined benefit pension plans.

  • Social Security Payroll Taxes: 

    High-income earners may be required to pay Social Security taxes on a larger proportion of their income. Now, employees and employers each pay 6.2% of wages to fund Social Security. This tax applies to earned income up to $142,800 for 2021. The new plan would increase Social Security taxes for earnings above $400,000, which would be taxed at 12.4%.

  • Financial Transaction Taxes:Whenever someone buys or sells a security, it would be considered a taxable event. This tax would pay for new government programs. Retirement plans tend to be the largest purchasers of securities, so the additional taxes may change how plan sponsors buy and sell.
  • Top Income Tax Rates: 

    The Biden plan proposes to increase the individual income tax rate on incomes above $400,000 from 37 percent to 39.6 percent.

Start Your Small Business 401(k) with Ubiquity

Looking for the best 401(k) for your small business? Ubiquity is a leading provider of 401(k) retirement plans for small businesses, whether you’re looking for a plan that covers one or 100. Our platform provides easy online setup in minutes and management that is accessible 24/7. Ubiquity customer service extends to both employers and employees alike. We are happy to help you navigate legislative changes and advise you on the best moves for your situation, at the industry’s most affordable flat-fee rate. Small business retirement planning can be a challenge, especially when the laws are always changing. Ubiquity is here to help. New plans are eligible for up to $16,500 in tax credits over the next three years, so contact us to learn more.

One of the benefits of a Solo 401(k) is that your spouse can also participate in the plan. If you both take taxable income from the same sole proprietorship, your spouse can make equal contributions.

A Solo 401(k) is designed for a business owner with NO employees. However, you may add a spouse to your plan as an exception to the rule. You may also employ:

  • 1099 contractors
  • Minors under 21
  • Union workers
  • Nonresident aliens, and
  • Part-time workers who put in less than 1,000 hours per year

If you plan to hire full-time W2 employees, you will need to stop making contributions and rollover your self-directed Solo 401(k) to a self-directed IRA or small business 401k within a year.

What Is the Benefit of Adding a Spouse to a Solo 401(k)?

A married couple with a Solo 401(k) can contribute a maximum of $114,000 per year for retirement as both employer and employees. If you and your spouse are over 50 years of age, total contributions can reach $127,000. Once the plan reaches $250,000 or more in assets, Form 5500-SF will need to be submitted to the IRS.

Get Your Complimentary Guide to Solo 401(k) plans

Download

How to Open a Solo 401(k)

Starting a Solo 401(k) online with Ubiquity takes only a few minutes. To get started, you’ll need an Employer Identification Number. You can choose your own investments or work with a broker of choice to select mutual funds, index funds, ETFs, individual stocks and bonds, or real estate investments.

Ubiquity handles all the day-to-day accounting and management for a low monthly fee, while you focus on growing your retirement nest egg. You can open your account at any time, but you’ll need to file the paperwork by December 31 to make it count for this year. Any contributions made until April of next year can be used to reduce tax liability for the year.

How to Include Your Spouse in Your Solo 401(k)

If you’re a sole proprietorship, your spouse will receive a W2 as an “employee.” This solution is best if the spouse has minimal duties in the business.

You can also choose to file as a partnership, where each partner receives a K-1 (Form 1065). The partnership bypasses income taxes, passing profits and losses onto each partner. The IRS views this structure as ideal if both partners contribute materially to the business.

A Qualified Joint Venture may be possible if both spouses work and contribute materially to the business and file a joint tax return. Each spouse reports income gains, losses, deductions, and credits separately on Form 1040 Schedule C.

Spouses can also form LLCs, and C or S corporations.

If you have any additional questions about starting a new Solo 401(k) or adding a spouse to an existing Solo 401(k), don’t hesitate to contact Ubiquity.

Are you ready to retire?

Get Started

With the end of the year fast approaching, many small business owners, independent contractors, and real estate investors are looking for tax savings. December is not too late to open a new 401(k) account, convert to a new retirement account type, or make your contributions. Depending on your situation, you may have more time than you think to plan the ideal tax scenario for 2020.

Contact Ubiquity for assistance with setup and ongoing administration. We cater to small businesses and self-employed individuals with flat-fee plans that meet your business needs and your budget.

Reasons to open a 401(k) before the end of the year

If you’ve put off thinking about your retirement until the end of the year, here are a few reasons to act now:

Generous contribution allowances will help you save for retirement.

401(k) account offers much higher contribution limits than most IRAs – some of which max out at $6,000. SEP IRAs do not allow employee contributions, so you may not be able to save as much as you’d like. In 2020, the annual 401(k) limit is $19,500 for employees or $57,000 for employer/employee totals, plus an additional $6,000 if you’re over 50. Next year, the employee maximum will stay the same, but this amount will increase to $58,000 total and $6,500 for the catchup contribution.

You’ll start compounding interest sooner rather than later.

When you invest in a 401(k), the money you add generates interest. This interest compounds year after year, as you earn interest on your interest.

Here’s an example. Let’s assume a very modest ability to save and a not-so-fantastic economy returning just 5 percent. If you were to put in $5,000 this month and contribute just $100/month to your 401(k), in 30 years’ time, you could have $105,924 saved for retirement.

On the other hand, say you put in the maximum of $57,000 today and contribute at least that much every year for 30 years. You’d be sitting on $4.2 million or more for retirement.

You had a particularly profitable year.

Some 401(k) plans allow you to make a year-end bonus deposit directly into your account to reduce how much taxes you owe for 2020 AND boost your retirement savings without cutting deep into your regular paychecks.

You want to get on track for next year.

Opening a 401(k) now will help you attain your New Year’s resolution to save more for retirement in 2021. Establishing an account with a generous contribution level is one of the best ways to achieve a comfortable future. If you want to hit the maximum for 2021, you can save up to $1,625 per month (for an annual total of $19,500). If you’re over 50, you can put in an extra $541.66 a month ($6,500 total). If you are self-employed, you can contribute as both employee and employer to a maximum of $57,000 a year, plus the over-50 contribution.

The deadline to establish a new Solo 401(k) account is December 31, 2020.

If you are self-employed with no full-time regular employees working for you (with the exception of a spouse), then you could qualify for tremendous tax savings with a Solo 401(k) account. You will be able to contribute as both employer and employee.

This means you can deposit a maximum of $56,000 (plus $6,000 more if you are over 50 years old) for yourself – which will then reduce your taxable income for 2020. You can also add your spouse to double your household savings if your spouse is not covered by another plan.

All you have to do is sign the Solo 401(k) adoption documents by December 31, 2020, and you will have until your tax return due date (April 15, 2021) to make the contributions for 2020. It is possible to apply for extensions to have until July 15 or even October 15.

If you’ve had a very lucrative year, you can also concurrently contribute money each month to put toward your 2021 return. If not, you can always take your time and save for the upcoming year well into 2022 in the same fashion, filing for tax return extensions if necessary.

Employers can adopt a new 401(k) plan by December 31, 2020 – or wait even longer!

The SECURE Act brought good news for employers: an extended deadline for adopting a new Traditional 401(k) plan! You used to have until December 31, but now you have until the tax return deadline – including extensions. Here’s what those 401(k) contribution deadlines look like for the 2020 Tax Year:

  • 12/2/20 – Convert a Traditional 401(k) into a Safe Harbor for 2020 with 3% nonelective contribution.
  • 3/15/21 – Adopt a 2020 Traditional 401(k) plan if you are taxed as a Partnership or S-Corp.
  • 4/15/21 – Adopt a 2020 Traditional 401(k) plan if you are a Sole Proprietorship or C-Corp.
  • 9/15/21 – Adopt a 2020 Traditional 401(k) if you filed an extension as a Partnership or S-Corp.
  • 10/15/21 – Adopt a 2020 Traditional 401(k) if you filed an extension as a Sole Proprietorship or C-Corp.
  • 12/31/21 – Convert a Traditional 401(k) plan into a 4% nonelective safe harbor plan for 2020.

Employees do not have more time to make salary deferrals, but employers have more time to decide whether they want to make a year-end profit-sharing contribution. Adding a Safe Harbor amendment to your plan is a great option if you worry you might not pass nondiscrimination tests for the year. Fortunately, you have plenty of time to make this decision.

Planning for the 2021 Plan Year

Now is also a good time to plan for the 2021 tax year using the following deadlines:

  • 11/2/20 – Notify SIMPLE IRA participants that their plan will convert to a new 401(k) plan on 1/1/21.
  • 12/2/20 – Notify participants that the Traditional 401(k) will convert to a matched Safe Harbor in 2021.
  • 12/31/20 – Plan your conversion of an existing 401(k) to a match-based Safe Harbor for 2021.
  • 10/1/21 – Adopt a new Safe Harbor 401(k) plan for 2021.
  • 12/2/21 – Convert a Traditional 401(k) plan to a 3% nonelective Safe Harbor for 2021.
  • 3/15/22 – Start a new Traditional 401(k) for 2021 if you’re an S-Corp or Partnership.
  • 4/15/22 – Start a new Traditional 401(k) for 2021 if you’re a C-Corp or Sole Proprietorship.
  • 9/15/22 – Start a new Traditional 401(k) for 2021 if you’re an S-Corp or Partnership with an extension.
  • 10/15/22 – Start a new Traditional 401(k) for 2021 if you’re a C-Corp or Sole Proprietor with extension.

If you have any questions about setting up a small business 401(k), contact Ubiquity to administer the plan.

Self Employed business woman at desk

One of the benefits of the Solo 401(k) is that it’s relatively easy to administer, with nothing more than a 5500-EZ form filing due once the total account balance reaches $250,000 or gets terminated.

However, to maximize the tax-exemptions for your small business retirement account, you will also need to claim your Solo 401(k) contributions on your tax return.

Clearing Up Solo 401(k) Confusion

When thinking of your Solo 401(k), it’s helpful to think of yourself as both “employee” and “employer.” Therefore, you will be making two different tax calculations – one for your business’ net earnings and one for your business’ tax-exempt contributions.

Get Your Complimentary Guide to Solo 401(k) plans

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How to Claim the Solo 401(k) Contribution for Pass-Through Businesses

If your business is a pass-through structure like a sole proprietorship, LLC, or partnership:

  • Submit both contributions to the IRS on your personal tax return, form 1040.
  • Calculate your earned income from the business using Schedule C.
  • Report the total employer and employee contribution on line 15 of Schedule 1.
  • Subtract the employer contribution from your taxable income to report adjusted income on line 8a of Schedule 1.

How to Claim the Solo 401(k) Contribution for S-Corps

If your business of one is classified as a corporation, business income and contributions are calculated as a separate entity, independent from your personal income tax return. However, S-corps receive special treatment, as business income may pass through to owners and shareholders.

You will need to file an additional tax return for your business in this case, but you enjoy freedom from any other “corporate tax” obligations.

  • Fill out your S-corp information using Form 1120-S.
  • List your Solo 401(k) employer contribution on line 23.
  • You will also need to fill out Form 5500 or 5500-SF if your account balance is over $250,000.
  • And, on a personal level, you will need to fill out the employee contribution on box 12 of your W2.

Keep in mind: your salary-reducing portion of the Solo 401(k) contribution has already been deducted from your taxable amount in box 1 of your W2.

What If You Have a Roth?

Roth contributions are after-tax, so they won’t be listed on your personal or business tax returns. While you aren’t claiming a deduction anywhere for the money put into your account, you will enjoy tax savings upon retirement as you’re taking the money out.

Have Questions About Claiming a Solo 401(k) Contribution Deduction?

As your 401(k) plan provider, we are always happy to assist our Solo 401(k) contributors at tax time. Use our convenient Solo 401(k) calculator, or contact our on-staff accountants to ensure you meet all necessary filing requirements and fully understand the unique advantages of a Solo 401(k). Contact Ubiquity to learn more.

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2020 Solo 401(k) Contribution Deadline

Dylan Telerski / 9 Nov 2020 / Business

deadline calendar

The 2020 tax year has shifted the deadline for when sole proprietors can start Solo 401(k) plans and how long they have to contribute.

Previously, you would have had until December 31, 2020, to establish your Solo 401(k) plan, which would allow you until April 15, 2021 (the Tax Filing Deadline) to make contributions. Now, Solo 401(k)s can be established up until the tax filling deadline–which for sole proprietors has been extended until May, 17 2021.

The New 2020 Solo 401(k) Setup Deadline for Sole Proprietors is  5/17/21

Your business must adopt a new Solo 401(k) by your tax deadline, in order to make 2020 contributions.

  • Sole Proprietors: 5/17/21 (unless you’ve filed an extension)
  • Partnerships: 3/15/21 (unless you’ve filed an extension.

If you haven’t adopted a Solo 401(k) yet, you should start now so your documents will be completed, and you can spread out your contributions over the next six months. If you establish a plan in 2021 for tax year 2020, you are past the deadline to make salary deferral contributions as an “employee”–but that doesn’t mean you can’t contribute to your plan.

As “employer,” you can set aside an additional 25% of the business entity’s income (to a maximum of $57,000) as a profit-sharing contribution. If you have a spouse working for the business, the same allowances may be made on his or her behalf to maximize your household retirement savings.

Get Your Complimentary Guide to Solo 401(k) plans

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Deadline Extended for Existing Solo 401(k)s

If you had a sole proprietorship Solo 401(k) in 2020, the contribution deadline is May 17, 2021. If you had an S-corp or partnership LLC, the deadline is March 15, 2021. Both of these deadlines could be extended another six months (until September or October 2021) by filing an extension request. This is a huge benefit for people who want to make 2020 contributions but won’t have the funds available until later in the year.

What You Should Be Doing Now to Prepare

Even though employer and employee contributions can be extended until the company tax return deadline, you will still need to file a W2 for your “employee” wages by January 31, 2021. This W2 details your wages and deductions for employee retirement plan contributions in box 12. At the very least, you should determine the amount you plan to contribute by this deadline.

Solo 401(k) Contributions Example

Here’s an example of how Solo 401(k) contributions might work out:

Josephine is 33 years old and set up a sole proprietorship Solo 401(k) for her housekeeping business in 2020. Josephine paid herself a wage of $50,000 for the year. She hasn’t made her contributions yet, but she wants to now to reduce her taxable income for the year and save for retirement. She can max out her 2020 Solo 401(k) contribution limit by:

  • Contributing as an Employee

    Josephine plans to save $19,500 by the tax filing deadline of May 18, 2021, which will reduce her W2 taxable income from $50,000 to $30,500. Assuming she is in a 20% federal tax bracket and a 5% state tax bracket, she’d save $4,450 in tax liability for the year AND setup a considerable nest egg that will compound interest for the next 30+ years. Way to go, Josephine!

  • Contributing as an Employer

    Josephine can save up to 25% of wage compensation not to exceed $57,000 as an employer profit sharing contribution. Since Josephine has taken a wage of $50,000, the company can make a 25% contribution of $12,500. The company lists this employee benefit expense on the tax return.

    All considered, Josephine contributed $32,000 for retirement ($19,500 as employee, $12,500 as employer) and paid less in federal and state taxes as both an individual and as a business. That’s a pretty great deal!

If you’d like to maximize your savings, then now is the ideal time to begin coordinating with your accountant and 401(k) plan provider.

Ubiquity is happy to help you set up a new Solo 401(k). We’ve offered a low, flat monthly fee since 1999.

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© 2021 Ubiquity Retirement + Savings
Privacy Policy
44 Montgomery Street, Suite 3060
San Francisco, CA 94104
Support: 855.401.4357

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