An individual 401(k) plan is really nothing more than a combined profit-sharing plan and 401(k) plan implemented by a self-employed individual or small business owner with no full-time employees (unless the full-time employee is the owner’s spouse).
Self-employed individuals and small businesses have, for some time, been able to establish both a profit-sharing plan and a 401(k) plan. Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 (“2001 Tax Act”), however, establishing both plans had little relative appeal. Self-employed individuals and small businesses adopting employer-sponsored retirement plans largely focused on simplified employee pensions (SEPs) or savings incentive match plans for employees (SIMPLE) IRA plans. These plans generally offered benefits somewhat comparable to those offered by profit-sharing plans and 401(k) plans, but without the associated administrative costs. Additionally, self-employed individuals and small business owners who established profit-sharing plans received little in the way of additional benefit from utilizing a 401(k) plan as well.
