A Solo 401(k) is a fantastic way for small business owners to save for retirement.  With high contribution limits typically ten times those of an IRA, both tax-deferred and Roth savings features, and even the ability to borrow from the plan, it is no wonder the Solo 401(k) is the plan of choice for solopreneurs.

With a truly self-directed Solo 401(k) plan from Safeguard Advisors, you also get the ability to invest in alternative assets like real estate, private equity, cryptocurrency, and more.

If you have an owner-only business without qualifying non-owner employees, your business is eligible to sponsor a Solo 401(k).

But what if you have ownership interest in more than one business, and there are employees involved in some of those businesses?  If the business are considered a controlled group, then you may not be eligible to sponsor a 401(k) without offering benefits to those employees.  That would close the door on qualification for a Solo 401(k).

What are Controlled Groups?

The Revenue Act of 1964 established controlled group rules as part of the Internal Revenue Code.  These rules that outline when multiple employers may be considered one for purposes of employee benefits.

The aim of controlled groups is to prevent business owners from giving themselves benefits not available to rank-and-file employees.

Businesses are considered part of a controlled group relationship under one of several structures:

• Parent-subsidiary
• Brother-sister
• Combination of parent-subsidiary and brother-sister
• Organizational attribution
• Family attribution
• Affiliated services

Parent-Subsidiary

If one company owns 80% or more of another company, a parent-subsidiary relationship exists.  Ownership can be in the form of stock or membership units, and is tallied by vote or value.

If either of the businesses in this group has employees, then neither is eligible to sponsor a Solo 401(k).

Brother-Sister

A brother-sister grouping of businesses exists when two tests are met.

• Five or fewer common owners hold 80% or more of the ownership interest of each company.
• The same five or fewer common owners have effective control, which is more than 50% of the stock or voting rights.

For purposes of this test, owners can be individuals, estates, or trusts.

Combined Group

When three or more organizations have shared ownership, they can be viewed as a control group when the following two conditions exist:

• Each business belongs to either a parent-subsidiary or brother-sister group.
• At least one entity is the parent in a parent-subsidiary group and is also a member of the brother-sister group.

Organizational Attribution

An individual may be considered an owner of a business if they have indirect ownership through another entity such as a corporation or trust.

A person who owns at least 5% of a corporation or partnership is considered an owner of any entity where that corporation or partnership has a stake.

A trust beneficiary is considered an owner of an organization where the trust is an owner.  They are considered to own the proportion of the trust’s share equal to their percentage of beneficial interest in the trust.

Family Attribution

Another indirect form of ownership occurs when certain family members have ownership in an organization.  Per IRC section 1563 family attribution rules, ownership held a family member may be added to the direct ownership of an individual to determine total ownership for purposes of controlled group testing.

For purposes of the above calculations, any direct or indirect ownership in an organization is factored in.

Spousal Exceptions

In many cases, ownership held by spouses is combined.  This often means that if you each have your own business, and one of you has employees, then both businesses are precluded from establishing a Solo 401(k).

There are exceptions that apply when the businesses can be distinctly separated by meeting the following criteria:

• A spouse has no direct ownership in the spouse’s business.
• A spouse is not employed by or hold a directing role in the spouse’s business, and does not participate in the management of the spouse’s company.
• The business does not receive 50% of more of its income from passive investments such as rents or royalties.
• A spouse’s stock is not subject to conditions that restrict the holder in favor the owning spouse or children under the age of 21.

When a spouse can be excluded from being considered an owner, that may allow one spouse to sponsor a Solo 401(k) in their owner-only business, even if the other spouse has a business with employees.

Affiliated Services

There are some cases where a set of organization may not be considered a controlled group based on parent-subsidiary or brother-sister criteria but are effectively a shared enterprise where all employees should be entitled to similar benefits.

This occurs when one company provides services to the other, both businesses provide services of the same type and share some ownership, or if one company is managing the other.

Ensuring Solo 401(k) Qualification

If you are considering a self-directed Solo 401(k), it is important to be aware of the rules surrounding controlled groups.

If you have an owner-only business and you and your spouse do not have ownership in other businesses with employees, then controlled group rules are not likely a concern.

If you are an entrepreneur with a stake in multiple businesses, then it will be wise to consult with your licensed tax or legal professionals to ensure your owner-only business is eligible to sponsor a Solo 401(k).