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Solo 401(k) Eligibility & Plan Setup

Solo 401(k) Eligibility by IRA Financial Group

The eligibility requirements for starting a Solo 401(k) plan are very straightforward. In this article, we’ll explain who can establish a Solo 401(k) and how to start a solo 401(k) for retirement savings. 

Solo 401(k) Eligibility

A Solo 401(k) plan is well suited for businesses that either do not employ any employees or employ certain employees that may be excluded from coverage. A Solo 401(k) plan is perfect for sole proprietors, consultants or independent contractors. The eligibility rules for a Solo 401(k) are pretty straight forward.

To be eligible to benefit from the Solo 401(k) Plan, investors must meet two eligibility requirements:

  • The presence of self employment activity.
  • The absence of full-time employees.

The Presence of Self Employment Activity

Self employment activity generally includes 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

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

More likely than not, the IRS will consider you eligible if the business is legitimate and is run with the intention of generating profits.

The 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.

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 that are Excluded from Coverage

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 will typically have to include them in any plan you set up.  However, a Solo 401(k) eligible business 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.

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