If you have part-time employee(s) that meet the following criteria, you will be ineligible for your Solo 401k per the SECURE Act:
At least 500 hours per year, and
For 2 or 3 consecutive years, starting from January 1, 2021
The above criteria does not apply to:
You
Your spouse, if employed by the business
Independent contractors (1099s), if paid by the business
However, if you have part-time employee(s) in your businesses that meet the above criteria, they will become eligible for the plan in 2024 or 2025. And this renders you ineligible for your Solo 401k, since it is designed for the owners only.
If you have any part-time employee(s), please do the following:
Check their hours
Starting from January 1, 2021, have they worked at least 500 hours for 2 or 3 consecutive years?
Part-time employee(s) who have worked at least 500 hours for 3 consecutive years become eligible for the plan in 2024. Those who have worked at least 500 hours for 2 consecutive years become eligible for the plan in 2025.
If they have worked and will remain under 500 hours, you remain eligible for your Solo 401k. But make sure that your plan documents have 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:
Notify Sense Financial Services to update or close the plan, if needed
If your part-time employee(s) have worked and will remain under 500 hours, you are still eligible for your plan, but your plan documents should have C.4.b checked as above to exclude the part-time employee(s).
If your part-time employee(s) have worked at least 500 hours for 2-3 consecutive years, you will need to close your plan by 2024. Notify Sense Financial to do so immediately.
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:
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 or long-term part-time employees (Long-term part-time employees are defined as those who work over 500 hours within a 12-month period for 2/3 consecutive years). 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 500 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 500 hours within a 12-month period and does so for 2/3 consecutive years, 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. Freezing the plan is meant to be a temporary measure.
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 less than 500 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.
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.
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.
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 use THIS FORM.
A spouse is eligible to participate in your plan if he or she is an employee of the company that adopts the plan.
Eligibility for a Solo 401(k) requires that there are no full-time employees in the adopting company other than owners, partners and their spouses. Independent contractors and part-time employees (who work under 1000 hours per year) are not considered full-time employees.
If your spouse is an employee of the company that adopts your Solo 401(k) plan, he or she is considered an “owner-employee” since the two of you are married. Another common occurrence is a husband and wife both owning and operating a business together. In both cases, both spouses can participate in the same Solo 401(k) plan.
Example
Let’s say Mary has a marketing company called “MMM Marketing”. Mary employs her husband, John, to do bookkeeping for the company. John can participate in the Solo 401(k) plan created for MMM Marketing.
Benefits of having a spouse participate in your plan
An eligible participant can make contributions to the plan from income received from the adopting employer.
Since your spouse will have his or her own set of contribution limits, spousal participation effectively doubles the total limits on contributions to the plan.
A spousal participant can also transfer eligible existing retirement funds into the plan.
Spousal participation also serves to eliminate the costs of having to create and maintain multiple plans.
As long as your spouse is an employee of the company that adopts the plan, he or she can participate. Your spouse does not necessarily need to be an owner of the company.
Establishing separate accounts
If your spouse is participating in the plan, we recommend setting up a separate bank account in the name of the trust for the additional participant’s contributions and/or rollovers. This is best for ease of accounting. Each account can be labelled with "FBO" (for benefit of) for each participant. The same would apply when opening other types of accounts in the name of the 401k trust, including brokerage accounts.
