Background and History of Self-Employed 401k

Commonly called Solo 401k Plan, Individual 401k Plan or Self-Directed 401k, the IRS created self-employed 401k in 1974 with the passage of ERISA. Therefore, self-employed 401k or Solo 401k is quite old. You see, a self-employed 401k is a traditional 401k but as the name implies for the self-employed and is thus subject to the same rules as all other 401ks.

Further, with the passage of EGTRRA in 2002 Solo 401k or self-employed 401k was brought into the spotlight because EGTRRA tremendously increased the amount that could be contributed to the 401k.

Specifically, EGTRRA promulgated that employee contributions are not included in the deduction limit calculation. Instead, just the employer contributions (profit sharing amount) are limited to the less than or equal to 25% of the employees’ (self-employed) compensation. The employee contributions can be made on top of the employer contributions.

Before the passage of EGTRRA, the employer profit-sharing contributions were combined with the employee deferral when determining the maximum deduction limit of 25% of employee’s compensation, thereby reducing the maximum annual contribution amount.