Solo 401(k) Eligibility
Who Qualifies for a Solo 401(k) Plan?
A Solo 401(k) plan is an employer sponsored retirement savings plan that is designed specifically for owner-only businesses. The lack of non-owner employees greatly simplifies the administration of the plan, and is a key part of what makes the Safeguard Solo 401(k) a great self-directed investing platform.
Many kinds of businesses can act as a plan sponsor, including those established as a sole proprietorship, LLC, partnership, or corporation. The enterprise needs to be engaging in a trade or business, with the intent to generate a profit, and have the potential to make future contributions to the plan.
Examples include:
- Independent Consultants
- Real Estate Agents
- Real Estate Developers/Flippers
- Professional service providers such as Attorneys, CPAs, Architects and Medical Practitioners
- Financial Advisors & CFP’s
- Boutique Retailers without employees
- Internet based sales or services businesses
- Physical Fitness Trainers, Coaches or Therapists
- Child or Adult Care Providers
- And many, many more.
Only active business endeavors such a providing a product or service are eligible. Passive earnings such as rental income or K-1 distributions are not viewed as wages, compensation, or self-employment income, and therefore cannot be used to make 401(k) contributions.
There are no business income requirements, so long as your business is actively engaged in a for-profit enterprise. Many start-up businesses establish a 401(k) plan as a means to attract and retain quality employees, even though they may not be profitable in the early stages. Of course, if the business turns out not to be profitable over time, then the business will shut down and the 401(k) will need to be terminated and rolled over to a suitable replacement such as an IRA based plan.
No Full-Time Employees
The Solo 401(k) can provide benefits to a business owner and their spouse, so long as the spouse is actively employed by the business. In order to sponsor the simplified Solo 401(k), however, there can be no non-owner employees of the business that work more than 1,000 hours per year (about 20 hours per week).
Your business can employee part-time workers, so long as no one employee exceeds a 1,000 hours of service per year threshold. Starting in 2021, part-time employees working at least 500 hours per year in 3 consecutive years will qualify for plan participation. The first year this will really have an impact on Solo 401(k) eligibility will be 2024.
1099 contractors are not viewed as employees, and do not impact plan qualification. You do need to be sure that a person providing services to your business legally qualifies as an independent contractor per your state laws, and should not be considered a true employee of the business.
Certain types of union employees and non-resident alien employees can be excluded from plan participation and may not affect plan qualification.
Employees under the age of 21 may be excluded from participation.
No Employees in Other Businesses
If you have a business that fits the qualification guidelines for Solo 401(k), you may not be eligible, however, if you or certain family members have ownership in other businesses that do have employees. The IRS defines a Controlled or Affiliated Service Group. If the same 5 or fewer owners have either 80% ownership or more than 50% effective control of one or more businesses, then those businesses are looked at as being one for purposes of plan qualification. If any business within such a group has employees, then all businesses within the group are treated as if they have employees.
Both an Employee and Self-Employed
You can be an employee of a business and also be separately self-employed. In this case, you are still eligible to establish a Solo 401(k) for your own business, even if you may also be participating in a 401(k) or other retirement plan through your primary employment. In such cases, your ability to make employee contributions will be capped at the overall limit of $20,500 if you are under age 50 or $27,000 if you are 50 or older. Your business that sponsors the Solo 401(k) can make a profit sharing employer contribution up to the plan maximum, independent of the other employer plan, however.
Multiple-Employer Plans
In some cases, you and/or your spouse may have multiple different businesses that create self-employment income. A Solo 401(k) plan can be configured with multiple participating employers. This can allow for the combination of income streams for making plan contributions, or as a means to fold a husband & wife with separate businesses into the same plan.
Some Examples
| YES | Alexis is a therapist and operates as a sole proprietor. |
| YES | Mike works for a large technology company as an employee. He also has a side business as an engineering consultant, which he runs as a LLC. Mike’s LLC can sponsor a Solo 401(k) plan. |
| YES | Antonio and his wife Marie are both realtors and operate as sole proprietors. Both of their businesses can co-sponsor a single Solo 401(k) plan. |
| MAYBE | Jessica and Samuel run a small resort with a few rental cabins and operate it themselves for much of the year. During the peak summer season, they hire some part-time employees to help. None of these employees work more than 1,000 hours.
Starting in 2021, long-term part-time employees working at least 500 hours per year for a period of 3 years will be eligible to participate in an employer 401(K). As of 2024, Jessica and Samuel may not qualify for a Solo 401(k) if they have employees working less than 1,000 hours in any given year, but at least 500 hours per year in 3 straight years starting in 2021. |
| YES | Cynthia has an S-Corporation that she uses to flip houses. Her husband James has a full time job, but does the bookkeeping and provides other administrative help for Cynthia’s business, and she pays him a small salary. Cynthia’s corporation can establish a Solo 401(k) and James can participate in the plan. |
| YES | Jose operates a construction and remodeling company as a LLC and is the sole owner/employee. He occasionally hires sub-contractors to work on projects and pays them on a 1099 basis. He can setup a Solo 401(k). |
| NO | Ivan is an independent realtor. He also owns a property management company and has 2 employees to help with administration and maintenance. As a realtor, he could sponsor a Solo 401(k), but his ownership in the property management company prohibits him from doing so. |
| NO | Susanna and Johan are doctors, and have a partnership for their practice. Johan’s wife owns a separate corporation that provides administrative and billing services to their practice and has 2 full time employees. While their partnership would qualify, they cannot establish a Solo 401(k) plan because of the related business with employees. |
This page has been updated to reflect law changes implemented by the SECURE Act of 2019.
