Solo 401 K Eligibility Requirements
Do you qualify for a Solo 401 k? The first step is understanding Solo 401 k eligibility requirements. Read on to find out if you might be eligible.
The Solo 401 k is designed for the self-employed, small business owner. Sole proprietors, such as independent contractors and consultants who do not employ anyone other than themselves (and potentially a spouse) may be eligible. LLCs and corporations may also qualify, provided that you (and potentially a spouse) are the only full-time employee(s).
To qualify for the plan, you must meet both of the following Solo 401 k eligibility requirements:
The presence of self-employment activity
You must be self-employed to qualify for a Solo 401 k. In other words, you must own and operate a business that is more than a hobby. And that business must be aimed to generate revenue.
There are various forms of self-employment businesses. The business can be organized as:
- Sole proprietorship
- Partnership
- Limited liability company (LLC)
- S-corporation
- C-corporation
- And more
Whatever the structure or activity, the business must have the intent to generate income and profit. The income is the basis of contributions to the Solo 401 k.
There are no required amounts of business profit to qualify for the plan. There are also no requirements for contribution amounts to the plan. In other words, you are not required to make contributions to the plan every year.
The absence of full-time workers and employees
Solo 401 k rules require that there are no full-time employees in the business, with the exception of the owner and potentially, the owner’s spouse. The owner (and the owner’s spouse, if employed by the business) are considered “owner-employees.” Other than the owner-employees, there must be no common, full-time employees.
Employees excluded from coverage
If you need to employ others in your business, make sure they are structured as independent contractors (1099s) or part-time employees. The IRS defines part-time as working under 1,000 hours within a 12-month period.
If you have part-time employees in your business, make sure that your plan has delayed eligibility requirements. These requirements basically exclude employees as long as they work under 1,000 hours within a 12-month period. With delayed eligibility requirements, you remain eligible for the Solo 401 k plan.
If an employee works more than 1,000 hours within a 12-month period, he/she becomes eligible for the plan, and you are then ineligible for the Solo 401 k. Remember that the Solo 401 k is designed for the owner and potentially owner’s spouse only. You would need to close the Solo 401 k and adopt a regular 401 k plan in order to cover those employees.
In summary, the Solo 401 k eligibility requirements are simple, but specific. Both requirements must be met in order to qualify for the plan.
Sense Financial has helped clients achieve checkbook control over their retirement accounts. If you have questions on whether you qualify for the Solo 401 k, contact us today.
