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Adopting Employer

What if I want to hire employee(s) in the future?

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I know the Solo 401k is only for self-employment businesses without employees (other than the owner). What if I want to hire employee(s) in the future?

Answer:

The Solo 401k plan is an Owner-Only plan. You cannot set up a Solo 401k/ Owner-Only plan if you have full-time employees. (Full-time employees are defined as those who work over 1,000 hours within a 12-month period). The only exception is a spouse who also works for the business.

If you would like to hire employee(s) in the future, please remember that the employee must work under 1,000 hours in a 12-month period. Otherwise, you may become ineligible for the Solo 401k plan.

To ensure compliance, it is important that you, as the employer, do two things:

  • Notify Sense Financial Services immediately if you have hired an employee (other than your spouse). Having an employee will require your plan documents to contain eligibility criteria. Unless you have notified us, your plan documents do not contain this eligibility criteria. It is important to notify us as soon as possible so your plan documents can be updated to reflect this change.
  • Keep track of the number of hours that the employee works in a 12-month period. Once the employee hits 1,000 hours within a 12-month period, he/she automatically becomes eligible for the Solo 401k plan. This causes you to become ineligible for the Solo 401k plan.

If you do hire full-time employees who meet the eligibility criteria, you must offer them the same benefits (e.g. a 401k plan). The Solo 401k is not set up to have any other employees besides the owner and his/her spouse. With full-time employees, you will have to terminate the Solo 401k plan and switch to a 401k plan which can include employees.

If you decide to terminate your Solo 401k plan, you will have to file a final 5500-EZ form with the IRS and transfer the funds out to another qualified plan. If you have assets in your Solo 401k plan such as real estate, you will need a self-directed type of plan or account to transfer your funds into. Most retirement plans will not accept assets such as real estate.

Self-directed 401k plans which include employees are expensive to maintain. Though it is possible, you may not want to go that route. Your two best options would then be:

  • Terminate the Solo 401k plan.  Set up a self-directed IRA and transfer all of your assets including real property into it.
  • Freeze your Solo 401k plan when you have eligible employees. Freezing a plan allows you to maintain your investments and continue to manage it as the trustee. However, you can no longer contribute to the plan.

How to choose a business to adopt your 401k plan

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If you have more than one business that you own, the following can help you choose which one you use to adopt your 401k plan.

The business must have no full time, non-owner W2 employees. In fact, if you have any full time, non-owner employees that receive a W-2 in any businesses that you or your spouse own, you are not eligible for a Solo 401k at all. This is true even if you have other businesses that do no have any employees.

  • Part time employees (W-2 employees who work fewer than 1,000 hours per year) do not affect Solo 401k eligibility
  • Independent contractors (workers who appropriately receive a 1099 instead of a W-2) do not affect Solo 401k eligibility
  • Other business owners who work for the company (such as your spouse) are also acceptable when determining Solo 401k eligibility.

Contributions to the 401k plan must come from earned income from the adopting employer. This is an important consideration. If you have a business that generates a lot of passive income, but no earned income, you will not be able to make contributions to any retirement plan, including the Solo 401k, from that business.

Adopting your Solo 401k plan with the business that provides you with the largest amount of earned income will maximize the contributions you can make to the plan.

Remember, you can adopt the Solo 401k with any entity type such as a sole proprietorship, a corporation, or an LLC. You do not have to have an established LLC or corporation to adopt the Solo 401k plan. If, for instance, you have an LLC that holds rental properties and generates very little earned income but you also work as an independent contractor as your main source of income, you can adopt the plan as a sole proprietor and make contributions based on your 1099 income.

Can a sole proprietorship sponsor my retirement plan?

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Do I need to incorporate or can I adopt a Solo 401k plan as a sole proprietor?

Answer:

Any type of business structure can legally adopt the Individual or Solo 401k Plan, including a corporation, LLC, partnership or sole proprietorship.  If your new business activity is going to take the form of sole proprietorship, then you can adopt the new plan as a sole proprietor.

Do I need a business EIN in order to establish my Solo 401k plan?

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I'm completing my Solo 401k application, and it asks for a business EIN. I am a sole proprietor and have been using my name and my Social Security number until now to run my business. Do I need to apply for new EIN? And once I have a new EIN, will I have to file a separate tax return for my business?

Answer:

Yes.  A business EIN needs to be listed on the Solo 401k plan documents.

The 401k plan must be adopted by any eligible business of any type (e.g. corporation, partnership, LLC, sole proprietorship, etc.). Proper Employer Identification Number (EIN) must be used in connection with the business. You can not use your Social Security number. Therefore you, as a sole proprietor, need to apply for new EIN with the IRS and use it in connection with your business and on your Solo 401k plan documents.

If you are a sole proprietor, you can continue filing Schedule C (part of your personal tax return). The new business EIN can be entered in section D of your Schedule C. This should have no effect on your tax return, but we suggest you consult tax professional for details.

What if the Solo 401k sponsoring entity changes or is dissolved?

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I currently have a Solo 401K. What if I decide to dissolve the adopting business? Can I change the adopting business of the plan to another one?

Answer:

Yes.  It is possible to amend the plan to reflect the change in the plan sponsor, while keeping the plan information the same.  The investments of the plan and bank accounts will not be affected. The Solo 401K plan can be adopted under another business provided that new business is also a form of self-employment without employees.

The adopting business of the plan can be in the form of a sole proprietorship, LLC, corporation, etc.

If you would like to amend your plan, please send information below to clients@sensefinancial.com

Provide the following information for the new adopting business:

1.  Name of business
2.  Business type (e.g. LLC, S-Corp)
3.  Business code

This is the six-digit business code that best describes the business activity of your business.  The list of codes is available on pages 9-11 of the link below:

https://www.irs.gov/pub/irs-pdf/i5500ez.pdf

4.  Business EIN
5.  Business start date
6.  Business state (i.e. where was your business organized?)
7.  Business address and phone number

Contributing from multiple businesses

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I own three LLCs (LLC #1, LLC #2, and LLC #3). My Solo 401k is adopted by LLC #3. However, LLC #1 generates significant income. Can I make contributions to the Solo 401k from LLC #1?

Answer:

No.  Contributions to your Solo 401k must come from the business that adopted it.

If LLC #1 generates most of the income, then you may want to restate your Solo 401k so that LLC #1 becomes the adopting employer of the plan. For assistance in restating your plan, please contact your Account Manager with Sense Financial.

Another option would be to set up a holding company for the three separate companies. The holding company would own the other companies. The other companies would then be subsidiary companies, doing business while being owned by the holding company. For this option, the Solo 401k would need to be restated with the holding company as the adopting employer of the plan.

The subsidiary companies need to be established as pass-through entities; meaning they don’t pay taxation at their own level. The subsidiaries would pass the earnings up to the parent company.

For example, the subsidiary company could be structured as a single-member LLC. The LLC would have one owner or one member which would be the parent company. As a single-member LLC, the subsidiary company would not have to file a tax return as a pass-through entity. The IRS instructs pass-through entities to be disregarded for tax purposes.

For further clarification, please consult your CPA or tax advisor.

Contribute to Solo 401k from multiple companies

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I want to be able to contribute to my Solo 401k from multiple companies to maximize the contribution potential. How can I do this?

Answer:

To do this, general opinion is that you can set up a holding company for the separate companies and make the holding company the adopting company for the Solo 401k. A holding company is usually a company that doesn’t do any business with anyone, it just owns other companies. The trick to making this work is of course to have the other companies which would be called, “Subsidiary companies” – the companies that go out there and do business and are owned by the holding company.

Those need to be pass-through entities; meaning that they don’t pay taxation at their own level, they just pass through the earning up to the parent company. So LLCs are pass through entities, and if you use LLCs, then one other benefit you’ll get is that you’ll have the subsidiary company structured as an LLC and it only has one owner or one member which would be the parent company. It would be a single member LLC. If you have a single member LLC, it doesn’t even have to file a tax return in the first place. Single member LLCs the IRS instructs to be disregarded for tax purposes. For further clarification, please consult your CPA or tax/legal advisor.