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?
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.