Solo 401k Eligibility

September 26 2024

Employees and your Solo 401k

Minna Nah Adopting Employer, Maintenance, Plan Updates, Setup, Solo 401k Eligibility

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.

For more information on terminating the plan:

How do I terminate my Solo 401k plan?

December 5 2017

Controlled group

Dmitriy Fomichenko Setup, Solo 401k Eligibility

I expect to own a separate business with full-time employees. Will this affect my existing Solo 401k, which is adopted by my business where I'm the sole owner and the only employee?

You must first determine if your businesses fall under controlled group rules, established by the IRS and Department of Labor (DOL).

Purpose of controlled group rules

Controlled group rules were created to protect employees from business owners who might structure their businesses to avoid providing retirement benefits to their employees.

For example, a business owner has a business with full-time employees. To avoid providing retirement benefits to those employees, the business owner creates a new, separate business in which he is the only employee. He uses that new, separate business to adopt a Solo 401k only for himself.

To reduce the occurrence of the above, the IRS and DOL established controlled group rules.

Controlled groups

As per Internal Revenue Code Section 414, a controlled group is any two or more corporations connected through stock ownership in any of the following ways:

Parent-subsidiary group

80% of stock of each (subsidiary) corporation is owned by another member of the group
Parent corporation must own 80% of the stock of at least one of the other members of the group
The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Brother-sister group

The same five or fewer individuals own at least 80% of the stock of the corporations
“Individual” includes ownership by an estate or trust
“Ownership” includes having a controlling interest and effective control of the corporations
The rules are subject to the stock attribution rules under Internal Revenue Code Section 318

Combined group

Combination of a Parent-subsidiary and a Brother-sister group

Controlled group rules are often complex, and it can be difficult to determine the controlled group status. Please consult with an experienced CPA and/or a qualified ERISA attorney to determine your status.

Additional information

https://www.law.cornell.edu/cfr/text/26/1.1563-1

November 1 2013

Spousal participation

Dmitriy Fomichenko Adopting Employer, Bank Account, Setup, Solo 401k Eligibility

Can my spouse participate in my Solo 401k plan?

A spouse is eligible to participate in your plan if they are an employee of the company that adopts the plan
If your spouse is an employee of the company that adopts your Solo 401k, he/she is considered an owner-employee since the two of you are married
Or, if a husband and wife both own and operate the business together, they can both participate in the same Solo 401k
Solo 401k eligibility requires that there are no part-time employees at 500 hours+/year or 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

Example

Mary has a marketing company called MMM Marketing
Mary employs her husband, John, to do bookkeeping for the company
John can also participate in the Solo 401k adopted by MMM Marketing

Benefits of having a spouse participate in your plan

A spouse who is eligible to participate in the Solo 401k can also make contributions to the plan, from his/her income received from the adopting employer
This effectively doubles the amount that can be contributed to Solo 401k
The spouse can also transfer eligible existing retirement funds into the plan
When both spouses participate in the same Solo 401k, this eliminates the costs of having to create and maintain multiple plans

Establishing separate accounts

Your Solo 401k requires separate accounts per participant and per type.

If your spouse is participating in the Solo 401k, he/she will need additional account(s) for their funds within the Solo 401k.

Separate accounts

October 23 2013

Active vs. passive income

Dmitriy Fomichenko Adopting Employer, Contributions, Setup, Solo 401k Eligibility

What is the difference between active, or earned, income and passive income?

How can I determine if I have earned income?

Can I contribute my investment income to the Solo 401k?

Active, or earned, income is earned from your business activity. Passive income comes from investments that you hold.

Active/earned income

Your eligibility for the Solo 401k is based on having an active self-employment business
Contributions to your Solo 401k can only be made from your compensation from your active self-employment business
Compensation is active/earned income

Defining compensation

The IRS describes types of active/earned income below:

https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/earned-income

Passive income

Passive income cannot be contributed to your Solo 401k
Some/all of your investment income can potentially be designated as earned income under the direction of your CPA. Please consult with your CPA to determine if your management or administrative work for your investments can be designated this way.