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What are SBO-401(k) Plans?

Money Manager | Monday, November 1st, 2010

SBO-401(k) plans are designed specifically for small business owners (SBOs). These plans are government registered and tax deferred, and can be used only by eligible participants. In order to be eligible to participate in an SBO-401(k) plan, the business must consist of the owner of the business along with their spouse. If the company has other employees, then these employees have to be ineligible to participate in an SBO-401(k) plan. These plans can be a great boon for small business owners who are self-employed, as they can give them an opportunity to participate in a retirement savings plan that is similar to what would be offered if they worked for a larger corporation. Business owners who choose to start an SBO-401(k) plan can operate the plan on their own, or seek professional management if desired.

What are some of the features of an SBO-401(k) plan?

These plans have recently become quite popular among independent small business owners. The name given to these plans may vary depending on the financial institution, but the overall details are the same. The SBO-401(k) plan is often described as a smaller version of a standard 401(k) plan, and it offers many of the same advantages. These plans are still very effective when used to save money for retirement, but they are much less complex and easier to establish, which can perfectly suit the needs of the small business owner. SBO-401(k) plans consist of both profit-sharing contributions as well as salary-deferral contributions.

What are some of the requirements for implementing an SBO-401(k) plan?

These plans can be used by small companies, even if they have other employees, if only the business owner and spouse are eligible to participate in the plan. However, if these other employees would also be eligible for plan participation, then the SBO-401(k) plan cannot be utilized. The small business owner can set the eligibility requirements in a way so that these plans can be used. For example, if the company employs two teenagers, and the eligibility requirements are set for a minimum of 21 years of age, then the SBO-401(k) could still be utilized by the business owner and spouse. The same would be true if the company only employed part time employees, and the eligibility requirements state that full time employment is necessary for plan participation. There can also be limits placed on years of service. However, it is important to be careful when setting up the eligibility requirements. For example, if the small business owner was only 20 years old and set an eligibility requirement of 21 years of age specifically to exclude the business’ teenage employees, the business owner would also not be eligible to participate in the plan.

How do SBO-401(k) plans compare to other retirement plan options?

These plans have high contribution limits, which can make them particularly attractive to small business owners who need to save money for retirement. Also, just as is the case with many other retirement plan options, you can take out a loan against the plan under certain guidelines if necessary. SBO-401(k) plans also do not require the same nondiscrimination testing that must be performed for 401(k) plans, since the plan only applies to the business owner and spouse, which can greatly simplify matters for the business owner.

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