Solo 401(k) Eligibility Rules
To be eligible to benefit for the Solo 401k Plan, investors must meet two eligibility requirements:
- The presence of self employment activity.
- The absence of full-time employees.
A Solo 401k is an IRS approved retirement plan that is well suited for businesses that either have no employees or no full-time employees, therefore are excluded from coverage. A Solo 401k plan is perfect for sole proprietors, consultants or independent contractors.
The Presence of Self Employment Activity
Solo 401k eligibility includes the presence of “self employment activity”. This generally refers to the ownership and operation of:
- A sole proprietorship
- Limited Liability Company (LLC)
- C Corporation, S Corporation
- Limited Partnership where the business intends to generate revenue for profit and make significant contributions to the plan
Generate Revenue for Profit
IRS will consider you eligible for the plan if the business is legitimate and is run with the intention of generating profits.
Self-employment activity can be part time, and it can be ancillary to full time employment elsewhere. A person can even participate in an employer’s 401(k) plan in tandem with their own Roth 401(k) retirement plan. In such a case, the employee elective deferrals from both plans are subject to the single contribution limit.
There are no established thresholds for:
- Profit the business must generate
- How much money must be contributed to the plan
- When and how quickly the profits and contributions must occur
The Absence of Full-Time Employees
Unlike a regular 401(k) plan, a Solo 401(k) retirement plan can be implemented only by self-employed individuals or small business owners with no other full-time employees. Additionally, they must not be employed by any business owned by them or their spouse. An exception applies if your full-time employee is your spouse.
The business owner and their spouse are technically considered “owner-employees” rather than “employees”.
Employees who are Excluded from Coverage
In order to maintain Solo 401(k) eligibility, the following types of employees may be generally excluded from coverage:
- Employees under 21 years of age
- Employees that work less than a 1,000 hours annually
- Union employees
- Nonresident alien employees
Do you have full-time employees age 21 or older (other than your spouse)? Do your part-time employees work more than 1,000 hours a year? If yes, you must typically include them in any plan you set up. However, a business eligible for the plan can have part time employees and independent contractors.
Get in Touch
Do you have questions regarding the Solo 401(k) eligibility requirements that we did not cover in this article? Contact IRA Financial Group directly at 800-472-0646. You can also fill out the form to speak with a 401(k) specialist to find out if you are eligible for the Solo 401(k) retirement plan.
Take advantage of your Solo 401(k) eligibility and start a plan today.