Expert: Allen - 2/3/2009

Question
Question
I have 2 small businesses. One is a small web design firm (llc / sole prop - NO employees) and I use profits from that to fund my ROTH. Then I have a lawn-care company, with myself, my wife, and one other non-family member as employee. currently, we have a SIMPLE - My wife and I contribute 10,500 each plus the "company" contributes its 3% - my employee does a simple 3%/3%.  (I contribute 3% of his pay, as does he)
I pay myself 22k, my wife 11k and my employee around 22k. Our AGI is usually at or below 50-55k when dividends, interest, scorp profits, unemployment for my wife, etc. are taken into account.  The lawn care business grosses 150k. The web design LLC/SP grosses 30k, with 12k profit.

Now I’m clear that the added benefit of a 401K would be outweighed by the costs, etc. I've weighed it in various lights -- especially offering the more generous aspects of it to my common law employee. HOWEVER, would THIS scenario be possible … I DROP out of the SIMPLE plan for my lawn care business (leaving my wife and employee on it). I then open a SOLO 401k for JUST me in the web design sole prop. LLC.  My lawn care business can pay my web design business for it’s website, and marketing, etc. so the web design will have a little more earnings to make it worth it.  SOLO401ks thru fidelity are as cheap as SIMPLES … I could simply abandon the SIMPLE altogether, give my employee a raise and then my wife and I could do the SOLO 401k via the web business, but the web business might have enough earnings in this regard, so my first idea will have to stand … your thoughts??

Answer
There are several things you need to know:
1. The SIMPLE must be the only plan established for your businesses in any year.
2. The SIMPLE must cover all employees (who meet the eligibility requirement) of all businesses you or your wife own.
3. If you establish a 401k, you must include employees (who meet the eligibility requirements) of all businesses you own. (There are some eceptions. However, none will apply in your situation.)
4. It is too late to establish a 401k in 2009. The SIMPLE must have been terminated before the beginning of the year.