401(k) is a particular section of the Internal Revenue Code that refers to pension, profit sharing and stock bonus plans. These plans have two components, salary deferral and profit sharing contributions. In 2001, Congress passed rules allowing for easy set up and administration of the Solo or “mini-version” of the 401(k) plan. A 401(k) plan combined with a profit-sharing plan, usually adopted by a sole proprietor or other business with no non-owner employees. Because 401(k) contributions do not count towards the limit on plan contributions which can be deducted (25% of compensation), a solo 401(k) plan enables some self-employed individuals to contribute and deduct more than under the 25% limit, which would apply under a regular profit-sharing plan or SEP-IRA.
