Questions on setting up 401k for small business

[theoverlook]

We have a small business with three employees, all of which are owners so do not count as "common law employees."  My research shows we can set up a Vanguard Individual 401k since we are all owners and there will be no fees since I qualify for Voyager services with Vanguard and will be active in the 401k.

https://investor.vanguard.com/what-we-offer/small-business/individual-401k

My first question is, can the employer - the business - make a contribution to the 401k of an employee that does not make a contribution?  While I plan to max out my contributions I do not plan to tie the employer contribution to the employee's contributions if it's not required; rather contributing the max that the company can to each employee's 401k.

All three of us draw salaries of $70k/year.  So for 2015 our limits are $18,000 employee contribution and $17,500 employer contribution, correct?

Lastly, if I set up the 401k prior to April 15th can I make an employer contribution for 2014?  What about employee contribution?  I assume no on the employee contribution since the funds are required to come out of a paycheck or deferred pay and all 2014 payroll has been disbursed.

My only regret is not realizing this awesome savings tool was available to us before now!  We could have cut our corporate and personal taxes in the last few years.  Ahh well, live and learn, at least I found it now.

[dandarc]

Set up a SoloK a couple years ago.

Plan needs to be set up by Dec. 31st, so I don't think you can put any in there for 2014.

I don't think there is a requirement to tie the employer contribution to a deferral - indeed safe-harbor plans often just put 3% in for all employees regardless.  You might ask Vanguard or a CPA or tax-attorney about this though.

Are the other partners on board with this?  You'd be taking a chunk of their profits and putting it into the 401K - which if that's what they want to do, great!

[Field123]

Might be worth looking into setting up a SIMPLE IRA. I know they are designed to be a much more convenient and less expensive alternative to 401Ks and they are designed for small businesses.

[theoverlook]

Thanks for the input so far.

I am going over all this with the partners and we'll only put in what we all agree to.

On the SIMPLE IRA, the limits are much lower.  It's limited to 3% of compensation on the employer side which is only $2,100, and that's just not enough.  And the employee side is limited to $12,500 this year.  I prefer the significantly higher employer contribution limits of the Individual 401k.

[Dr. A]

Thanks for the input so far.

I am going over all this with the partners and we'll only put in what we all agree to.

On the SIMPLE IRA, the limits are much lower.  It's limited to 3% of compensation on the employer side which is only $2,100, and that's just not enough.  And the employee side is limited to $12,500 this year.  I prefer the significantly higher employer contribution limits of the Individual 401k.

You're on point here. I am enrolled in a SIMPLE IRA and set up a solo 401(k) for my wife last year. That 3% is not even a limit, it is a "thou shalt match 3%, no more no less".

I'll assume for this post you are correct that you are eligible for the solo. However, I was under the impression that the solo 401(k) was for businesses where the only employees were an individual owner and their spouse. To quote the IRS:

It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse.

http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

But your Vanguard link does seem to contradict this, so I dunno.

My first question is, can the employer - the business - make a contribution to the 401k of an employee that does not make a contribution?  While I plan to max out my contributions I do not plan to tie the employer contribution to the employee's contributions if it's not required; rather contributing the max that the company can to each employee's 401k.

My understanding is yes, the contributions can be made however you want. The employee does not need to contribute a dime in order to receive an employer contribution. Functionally, as the plan administrator for my wife's plan (with Vanguard) I go in and am given a bunch of blanks for each employee (her and me) in which I can fill in employee or employer contributions in any denomination I choose.

[theoverlook]

I'll assume for this post you are correct that you are eligible for the solo. However, I was under the impression that the solo 401(k) was for businesses where the only employees were an individual owner and their spouse. To quote the IRS:

It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse.

http://www.irs.gov/Retirement-Plans/One-Participant-401%28k%29-Plans

You know, that is an interesting point.  I was relying on Vanguard's description and a few limited readings around the web.  I will do some more research into it and call Vanguard on the question of whether a C-corp with 3 owner/employees can have this type of 401k.  I know Vanguard calls it an "individual 401k" as opposed to the "solo 401k" that the IRS calls it, but I believe they are referring to the same type of plan.

Failing the individual 401k, an SEP IRA should work but wouldn't have the employee contribution component so would lose the tax benefit those offer.