Solo 401k Eligibility
These plans are best suited to businesses without employees or to businesses that employ workers who do not qualify for coverage. Among those who can benefit from a Solo 401k plan are sole proprietors, home based business, independent contractors and consultants.
To be eligible to participate in a Solo 401k plan, investors must meet two requirements:
- Legitimate self-employment activity
- No full-time employees
Self Employment Activity
The first Solo 401k Eligibility Requirement is the presence of legitimate self-employment activity. Self-employment that qualifies for Solo 401k participation includes ownership/operation of profit-generating sole proprietorship, Limited Liability Companies (LLC), C Corporations, S Corporations, and Limited Partnerships that intend to make significant plan contributions. Self-employment can be part-time, and it can take place in tandem with full-time employment elsewhere. Persons who elect to participate in an employer’s 401k plan can do so while contributing to a Solo 401k, in which case their contributions are subject to the single-contribution limit for elective deferral part.
Generate Revenue for Profit
The Internal Revenue Service has no thresholds for how much profit a business with a Solo 401k plan must make. The generally accepted rule of thumb is that the IRS will consider legitimate businesses eligible if they are operated with the intention of generating profits. The IRS also has no formal requirements for the level of contributions to a plan or for how soon the business must make a profit and plan contributions.
Absence of Full-Time Employees
Solo 401k plans, unlike regular 401k plans, can be implemented only by self-employed persons or small-business owners who have no other full-time workers. An exception applies if the owner’s spouse is a full-time employee. In that case, the business owner and spouse are technically considered “owner-employees” rather than “employees.” In addition, self-employed owners or operators of a business cannot have any full time employees by any other business owned by them or their spouse.
Rules for Solo 401k plans exclude from coverage the following types of employees:
- Employees under 21 years of age
- Employees who work less than 1,000 hours per year
- Union employees
- Nonresident-alien employees
Businesses operated by self-employed individuals that have full-time employees 21 and older (other than a spouse) or part-time employees who work more than 1,000 hours a year ordinarily must include them in any plan they set up. However, companies can employ part-time workers and independent contractors and still be eligible to establish Solo 401k plans
Solo 401k Eligibility can be easily met. Please contact one of our Retirement Account Experts to help you figure out if you qualify.