Secure Act 2.0 Keeps Door Open for Higher Limits in Solo 401(k)s

What You Need to Know

The Secure 2.0 Act fixed an issue created by the original Secure Act.
This new rule is effective for plan years beginning after Dec. 29, 2022.
It’s important for clients to understand the added value for first-year contributions created under the Secure 2.0 Act.

Both the Setting Every Community Up for Retirement Enhancement (Secure) Act and the Secure 2.0 Act made valuable changes to make saving for retirement easier and more attractive for taxpayers. Secure Act 2.0 also contained some provisions designed to “fix” issues created by the original Secure Act.

One of those issues was a new rule that allowed business owners to establish solo 401(k)s retroactively — but only permitted employer contributions after the end of the calendar year. This limitation made it difficult for small-business owners who were attracted to the structure, yet would not be certain about their earnings for the plan year until early in the next year.

Secure Act 2.0 fixed this “glitch” to allow retroactive employee deferrals. Interested business owners shouldn’t wait to act and should be advised about the value of these retirement savings accounts today.

Solo 401(k)s: The Basics

A solo 401(k) is a 401(k) plan that covers only the business owner and their spouse. In most ways, the solo 401(k) operates in the same manner as a traditional 401(k) — meaning that contributions are made on a pre-tax basis and subject to ordinary income taxes when withdrawn during retirement.

One key advantage of a solo 401(k) plan is that the employer-participant is not required to perform nondiscrimination testing because there are no employees to consider, whether non-highly compensated or otherwise. Filing requirements are also minimal — if the plan’s assets are at least $250,000 at year-end, the plan is required to file an annual report on Form 5500-EZ.

Solo 401(k)s also allow the owner to make larger contributions each year. For 2022, the owner-employee can contribute up to $20,500 (with a $6,500 catch-up contribution, for a total limit of $27,000 if the participant is 50 or older) in pre-tax dollars per year as an employee. The contribution limit increases to $22,500 with a $7,500 catch-up contribution limit for 2023.

However, the business owner is also permitted to contribute to the solo 401(k) plan as employer (for a total employer-employee contribution limit of $61,000 in 2022 (or $67,500 for those ages 50 and older). The limit increases to $66,000 in 2023 with a $7,500 catch-up contribution limit.