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Is a Solo 401(k) Plan subject to the ERISA rules?

Avner G., CO

Hi Avner,

The Solo 401K Plan, also called the Individual 401K or Self Directed 401K Plan is an IRS approved retirement plan that was designed by the IRS specifically to provide a cost effective and easy administer 401(k) qualified retirement plan. The Solo 401K Plan includes all the attractive options of a conventional 401(k) qualified retirement plan, but without the costly administrative requirements. This is because the ERISA rules and regulations do not apply to a Solo 401(k) Plan since there are no common law employees to protect since the only employee(s) is the business owner(s) and spouse. The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for pension plans in private industry.

Pursuant to DOL regulations under 2510.3-3(c):

c) Employees. For purposes of this section:

(1) An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, and

(2) A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.

Hence, a business whose only employees are a husband and wife will not be subject to the ERISA rules if the business adopts a 401(k) Plan. Thus, a business owner with no common-law employees does not need to perform any ERISA nondiscrimination testing for the plan, since there are no employees who could have received disparate benefits. The no-testing advantage vanishes if the employer hires employees.

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