Does the Solo 401k get its own EIN, separate from the EIN of my business?
If I’m a sole proprietor, do I need to get an EIN for my sole proprietorship? I’ve been using my name and my Social Security Number for everything related to my sole proprietorship, like filing taxes.
Your Solo 401k plan documents will list the EIN of the adopting business and the EIN of the Solo 401k.
Solo 401k has its own EIN
The Solo 401k is a separate entity from you and your business. The Solo 401k has its own EIN.
When we create your plan documents, we obtain the Solo 401k EIN for you. The Solo 401k EIN will be listed on your plan documents and included in your set of plan documents.
Your adopting business has its own EIN
Your adopting business, which represents your self-employment, should have its own EIN
This is separate from the EIN of the Solo 401k, which we will obtain for you
We do not obtain the EIN for your adopting business
EIN for sole proprietorships
If your adopting business is a sole proprietorship, an EIN for the sole proprietorship must be listed on your plan documents.
The plan documents should not list your Social Security Number as the business number of your sole proprietorship
The sole proprietorship EIN is separate and different from the EIN for the Solo 401k
If you are a sole proprietor, and you have used your name and SSN for your sole proprietorship, you can continue to do so as it relates to your business
When filing taxes for your sole proprietorship, for example, you can continue to list your SSN on the tax return, while noting the EIN of your sole proprietorship in Section D of your Schedule C
Use the appropriate EIN for your business and for your Solo 401k
When conducting your self-employment business, use the EIN for your self-employment business
When investing with your Solo 401k, use the EIN for your Solo 401k
Corporations or LLCs with corporation elections are required to pay a reasonable compensation.
An officer of a corporation who provides services to the corporation is generally considered as an employee of the corporation
The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes. S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.
As an officer of a corporation, you must be paid reasonable compensation
Reasonable compensation is defined as “commensurate with your duties” and “the value that would ordinarily be paid for like services by a like enterprise under like circumstances” (from the IRS articles below)
Reasonable compensation is subject to employment taxes
Reasonable compensation must be processed via payroll on a W2
Your W2 figure is the starting figure to calculate contributions from
Pass-through income reported on Form 1120S (Schedule K-1) is not considered self-employment income and cannot be counted toward calculating contributions to the Solo 401k for those with a corporation
Your Solo 401k contributions are based on your compensation from the adopting business of your Solo 401k. Your compensation determines the amount you can contribute.
Compensation must come from the adopting business of your Solo 401k, not from an outside company or source
Compensation is what that adopting business is paying you
Compensation is subject to self-employment or payroll taxes
You cannot contribute more than what you earn in compensation
Since your Solo 401k contributions are based on your compensation, it’s important to define compensation correctly.
So what is compensation?
Compensation is active, not passive, income
Active income is earned from your business activity. Rental income from properties is passive and would not qualify as compensation.
Defining compensation depends on the tax status of the adopting business
If your adopting business is a:
Sole proprietorship (or LLC taxed as a sole proprietorship)
Partnership (or LLC taxed as a partnership)
Your compensation is defined as “earned income”. This is roughly:
Net earnings (business revenue – business expenses) – ½ your self-employment tax
*Technically, your final compensation figure as a self-employed individual would not include your contributions, as they will be deducted. However, the above formula can be a start for calculating the compensation figure. This is a “circular calculation”- your compensation figure depends on your contribution figure, and your contribution figure depends on your compensation figure.
If your adopting business is an:
S-corporation (or LLC or partnership taxed as an S-corporation)
C-corporation (or LLC or partnership taxed as a C-corporation)
As plan administrator, you are responsible for administering the plan according to the plan documents and in compliance with the IRS.
Your responsibilities as plan administrator include:
Keeping records of all plan activities
Filing on behalf of the plan as needed, including 1099-Rs and 5500-EZs
Ensuring participant loans, if any, are being paid back in a timely manner
Keeping records of all plan activities
Recordkeeping is one of the main responsibilities of the plan administrator. You will need records of all contributions, distributions, investments, etc.
The Miscellaneous Forms section contains forms that you can complete and keep in your files as plan administrator:
Separate accounts are required by your plan. They must be established for each participant and per type(s) of funds within the plan. They are also helpful for tracking the balances of each type of fund within your 401k.
Filings on behalf of the plan as needed, including 1099-Rs and 5500-EZs
You are also responsible for all filings on behalf of the plan. Depending on the activities and value of your plan, you may be required to file a 1099-R and/or a 5500-EZ:
Ensuring participant loans, if any, are being paid back in a timely manner
If a participant loan is taken from your Solo 401k, you also become loan administrator. You must ensure that all participant loans are being repaid in a timely manner, according to the repayment schedule established at the time of the loan.
Can I have part-time or full-time employees in my business, if I have a Solo 401k? What if I want to hire employees in the future?
Your Solo 401k is an owner-only plan.
It is designed for the owner of a business who does not have full-time or certain part-time employees, other than the owner and potentially, the spouse.
You are not eligible for the Solo 401k if you/your spouse:
Own business(es) that have full-time employee(s), other than yourselves
Own business(es) that have part-time employee(s), other than yourselves, who work:
At least 500 hours per year, and
For 2 consecutive years
The above criteria does not apply to independent contractors (1099s), if paid by the business. Independent contractors are not considered employees of the business.
If you have any part-time employee(s), please do the following:
Check their hours
Any part-time employee(s) who have worked at least 500 hours for 2 consecutive years become eligible for the plan. And this causes you to become ineligible for the Solo 401k, because the plan is meant for owners only.
If your part-time employee(s) have worked and will remain under 500 hours
You remain eligible for your Solo 401k
Make sure, however, that your plan documents contain the service requirement described below
Check your plan documents
If you have any part-time employee(s), you should have a service requirement checked in your plan documents
Review your Post PPA Defined Contribution Adoption Agreement, page 5
C4.b should be checked as below:
Contact Sense Financial to update the plan if the above service requirement is not marked in your plan documents
Notify Sense Financial Services to update or terminate the plan, if needed
If your part-time employee(s) have worked at least 500 hours for 2 consecutive years, you will need to terminate your plan
Notify Sense Financial to do so immediately
Freezing the plan may be a possible temporary option, before terminating the plan. It allows you to maintain your investments and continue to manage it as the trustee, without the ability to contribute to the plan. It is meant to be a temporary measure only.
When is the deadline to establish a Solo 401k and make contributions to it? And is the deadline affected if I have an extension on my tax filing?
It depends on the tax status of the adopting business of the plan.
The tax status determines the tax filing deadline
The tax filing deadline is the deadline to establish and contribute to the plan
Note, however, that if you have an extension for your tax filing deadline, this may or may not affect the deadline to establish and contribute to your plan.
Tax Status
Filing Deadline
Extended Deadline
S-Corporation (or LLC taxed as S-Corp)
March 15
September 15
Partnership (or LLC taxed as a partnership)
March 15
September 15
C-Corporation (or LLC taxed as C-Corp)
April 15
October 15
Sole Proprietorship (or LLC taxed as sole prop)
April 15
October 15
Tax filing deadlines and extensions
Establishment
The SECURE Act allows employers to establish a Solo 401k for the taxable year, after the taxable year is over, if the plan is established by the tax filing deadline for that taxable year.
This may or may not be affected by an extension, depending on the tax status of the adopting business of the Solo 401k:
Adopting businesses with tax status of a partnership or corporation can establish a Solo 401k by the business’s tax filing deadline, including extension
Adopting businesses with tax status of sole proprietorship can establish a Solo 401k by the business’s tax filing deadline, no extension (April 15)
Employer contribution
All adopting businesses can make employer contributions to the Solo 401k by the business’s tax filing deadline, including extension
Employee contribution
Adopting businesses with tax status of a partnership can make employee contributions to the Solo 401k by the business’s tax filing deadline, including extension
Adopting businesses with tax status of corporation can make employee contributions to the Solo 401k by the end of the taxable year because the employee contributions must be processed through payroll
Adopting businesses with tax status of sole proprietorship can make employee contributions to the Solo 401k by the business’s tax filing deadline, no extension (April 15)
The Automatic Enrollment feature can be added to your Solo 401k plan, allowing you to receive a $1500 tax credit over 3 years.
What it is
The Automatic Enrollment feature allows employers to contribute a default portion (e.g. 3%) of an employee’s wages to the retirement plan, on the employee’s behalf.
With the Solo 401k, you are typically both the employer and the employee. You may also have a spouse as an additional employee. By adding the automatic enrollment feature, you are setting a default contribution to be made for each employee in the plan.
With this feature, the IRS allows you, as the employer, to claim a $1500 tax credit over 3 years- a $500 dollar-for-dollar tax reduction per year if you maintain the arrangement over 3 years.
Applies to the employee contribution
With Automatic Enrollment, the employer must make at least a 3% salary deferral contribution for each employee. This is typically done as a pre-tax employee contribution.
However, the employee can elect to do otherwise by completing an election form within a certain time frame. The employee can elect to:
Make a portion or all of the contribution as Roth
Make a greater contribution than the 3%
Make a lesser contribution than the 3%
Not make the contribution at all
To make this election, the employee must complete the Deferral Election form. This form is located in our Miscellaneous Forms section:
The completed Deferral Election form is submitted to the plan administrator. Typically, this is you- you are the employee, employer, and the plan administrator.
The employee must complete the Deferral Election Form and then typically, also keep the form as plan administrator. This form must be completed within 60 days of receiving the notice.
Note that the limits for the employee salary deferral contribution still apply to this arrangement:
The employee salary deferral contribution limits still apply. For example, the limit for 2024 is $23,000.
The employee salary deferral contribution, as the employer profit sharing contribution, is based on your compensation from the adopting business.
The employee salary deferral contribution limits are per person, not per plan. If you have already reached the limit through another employer-sponsored plan for the year, you will not be able to make this contribution to this plan.
All employee elective deferral contributions, including those under this arrangement, cannot be withdrawn from the plan unless you are 59.5 or older.
Requirements for the arrangement
The Automatic Enrollment feature must be for the full plan year. It has two requirements:
Uniformity requirement: The arrangement must uniformly apply to all employees after giving them the required notice.
Notice requirement: A notice of the Automatic Enrollment must be given to all employees within a reasonable period of time, e.g. 30 days before the arrangement is adopted. Notices must also be given to all employees in subsequent years.
Your first notice is included in your set of plan documents (“Automatic Enrollment Notice”). Please review the notice carefully.
Claiming the tax credit
The $1500 tax credit is given over 3 years at $500 per year. You must maintain the Automatic Enrollment feature for all 3 years to claim the tax credit. The tax credit is a dollar-for-dollar reduction (vs. a deductible expense).
To claim the credit, you must file Form 8881 for the first year Automatic Enrollment was included in your plan:
See the section for Part II. Small Employer Auto-Enrollment Credit
You are responsible for this filing. Please make sure to file this in a timely manner.
What to do
Review the Automatic Enrollment Notice carefully
You are responsible for the administration of this arrangement. It is important that you are aware of your responsibilities under this arrangement.
Distribute the notice to all employees of the adopting business of your plan on an annual basis
Contribute to the plan per the default employee contribution or complete/keep the Deferral Election form, if doing otherwise
You must actually make the employee contribution(s) as stated in your arrangement. Or if doing otherwise, you must complete and keep the Deferral Election form to document the change.
Did you know that you are the fiduciary of your Solo 401k?
In addition to being a participant in the plan, administering the plan as plan administrator, directing the plan as trustee, you are also the fiduciary.
This means that you are responsible for doing the following, as noted by the US Department of Labor (DOL):
Acting solely in the interest of the participants and their beneficiaries;
Acting for the exclusive purpose of providing benefits to workers participating in the plan and their beneficiaries;
Paying only reasonable plan expenses;
Carrying out duties with the care, skill, prudence, and diligence of a prudent person familiar with such matters;
Following the plan documents; and
Diversifying plan investments
With the benefits of your Solo 401k comes responsibilities. To equip yourself for your fiduciary responsibilities, do the following:
Read your plan documents
Review the set of plan documents that was sent to you by Sense Financial.
The Defined Contribution Adoption Agreement is the central document of your set. Take a few minutes to read through it.
The Summary Plan Description takes the selections from the Defined Contribution Adoption Agreement and spells them out in plain language, in a question and answer format.
Read and watch the resources on the client portal
The client portal is your go-to resource, available at all times.
The Knowledge Base is a great section to read, look up topics via search, and learn. Our videos are also available in the Education section of the client portal.
Make sure you are subscribed to Sense Financial's emails
Most importantly, our compliance emails. We regularly send out announcements, reminders, and updates related to keeping your plan in compliance.
List quoted from the US Department of Labor (DOL) resource below:
As an employer-sponsored plan, the Solo 401k requires an adopting business. The adopting business must represent your self-employment.
If you have more than one self-employment business that you own, consider the following when choosing which self-employment business will adopt the plan.
Adopting business can be any entity type
The Solo 401k can be adopted by a sole proprietorship, LLC, corporation, etc. You do not have to have an established LLC or corporation to adopt the Solo 401k.
Adopting business must not have any full-time employees, besides yourself and potentially, your spouse
As an owner-only plan, the Solo 401k is designed for a self-employment business that does not have any full-time employees, besides the owner and the owner's spouse.
Part-time employees (W-2 employees who work less than 500 hours/year) do not affect Solo 401k eligibility
Independent contractors (workers who 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) do not affect your Solo 401k eligibility and can also participate in the plan
Contributions to the Solo 401k are made from your compensation from the adopting 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.
I currently have a Solo 401k, under one self-employment business. If I have another business, can I change the adopting business of the Solo 401k to that other one?
What if I am closing my self-employment business, but don't have another?
If you have another self-employment business
Yes, the adopting business of your Solo 401k can be changed to another self-employment business that you own. This would occur through an amendment to your plan.
In an amendment, the plan information stays the same:
The 401k plan name stays the same
The 401k EIN stays the same
The information on the 401k accounts and investments stays the same
To amend your plan:
Check that the new self-employment business meets the requirements for the adopting business of the plan
Once we receive your amendment form, we will process the amendment to your plan and send you the plan documents for your signature and safekeeping.
If you don't have another self-employment business
The 401k is an employer-sponsored plan and requires a self-employment business to adopt it. If you are closing your self-employment business without another, you will need to terminate the 401k.
