Solo 401k Eligibility

Solo 401k plans are best suited to businesses without employees or businesses that employ workers who do not qualify for coverage.  To be eligible to participate in a Solo 401k plan, investors must meet two requirements:

Self Employment

The investor must be a sole proprietor, home-based business owner, independent contractor, consultant, or small business owner.

No Full-Time Employees

The business must not employ anyone full-time except the participant and their spouse.

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 a profit-generating sole proprietorship, limited liability company (LLC), C corporation, S corporation, or limited partnership that intends 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 this case, their salary deferral contribution limit to a Solo 401k and a regular 401k remains the same at $18,000. 

Generating Revenue for Profit

The Internal Revenue Service has no threshold 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 operating with the intention of generating profits. The IRS also has no formal requirements for the level of contributions to a plan or how soon the business must begin to make a profit and plan contributions.

How to Qualify for a Solo 401k

Michael Atias, director of OTA Tax Pros, explains how investors can generate self-employed income and become qualified for the Solo 401k plan.

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 exists 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 to the full-time employee restriction, self-employed owners or operators of a business cannot have any full-time employees working at any other business owned by them or their spouse.

Usually, when a business sets up a retirement plan, it has to include in the plan any full-time employees 21 and older (other than a spouse), or part-time employees who work more than 1,000 hours a year. However, companies can employ part-time workers and independent contractors and still be eligible to establish Solo 401k plans.

Solo 401k plan rules 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

Alternate investment options you get with a Self Directed Solo 401k:

Real Estate

Precious Metals

Private Business

Stock & Funds

Private Lending

Tax Deeds/Liens

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