Solo 401k Eligibility/Qualifying For a Solo 401k Plan

The solo 401(k) has been available since the inception of the 401(k); however, it became popular with the passage of the Economic Growth and Tax Reconciliation Act (EGTRRA) of 2001. 

Here is the what the following IRS page says:https://www.irs.gov/retirement-plans/one-participant-401k-plans

A solo 401(k) is specifically for owner-only businesses and easier to maintain than the conventional 401(k) plan.

Who is Eligible to Open a Solo 401(k)

• Only businesses with only employees who are owners of business and their spouses can open a solo 401k plan.

• However, any type of business entity is eligible to establish solo 401(k) plan, including:

1.       sole proprietors,

1.       partnerships, 

1.      corporations (both subchapter S and C corporations), and

1.      limited liability companies (LLCs).

The following types of businesses fit into the category of “owner-only coverage.”

One-Person Businesses

The most obvious entity that would qualify for owner-only status is a business that employs only the owner of the business, regardless of whether the business is incorporated or unincorporated.

Family Businesses

Another business arrangement that may qualify for “owner-only coverage” is a typical family business. If the only employee other than the business owner is a spouse, the plan automatically qualifies for owner-only coverage because the spouse generally is considered an owner of the business.

Businesses With “Excludable” Common-Law Employees

Yes solo 401(k) plans are designed for only owner-only businesses. However, a business that employs part-time common-law employees (none business owners) are still eligible to establish solo 401k plan.

Owner-only businesses generally may exclude the following employees from participating in the solo 401(k) plan.

• Employees under age 21

• Employees working less than 1,000 hours per year, and as a result do not meet the plan’s eligibility requirements

• Nonresident aliens

• Union employees

Can I transfer current employer retirement plan such as a 401(k) plan to a solo 401k plan?

Generally no unless you meet a triggering event such as:

• Retirement age: Generally defined as age 59 ½;

• Separation from service; or

• Termination of the retirement plan.

However, some plans do allow for in-service distributions if you don’t meet one of the above events. This feature is provided on a plan-by-plan basis, so you will need to check with the current plan administrator.

Ask your plan’s administrator for a copy of the plans summary plan description (SPD). Larger plans usually make the SPD available on the company’s benefits website.The plan will include language pertaining to the in-service distribution rules.

 QUESTION: Are solo 401k Plans Protected from Creditors?

ANSWER:  Because a solo 401k plan is not subject to Title I of ERISA, creditor protection to solo solo 401k plans and IRAs falls at the state level instead of the federal level.

For example, both Texas and Florida already offer full creditor protection to both solo 401k plans and IRAs.

[Fla. Stat. Ann Sec. 121.131 & 222.21]

[Tex. Prop. Code Sec. 42.0021]

However, Missouri and Ohio, for example, do not offer full creditor protection.

[Ohio Rev. Code Ann. Sec. 2329.66(A)(10)(b)&(c); In re Rayl, 229 B.R.465]

[Mo. Ann. Stat. Sec.513.430.1(10)(e) & (f)]]

QUESTION: Solo 401k or IRA: Should I use a Self-Directed IRA or a Self-Directed Solo 401k Plan to invest in real estate if I plan to use a non-recourse loan?

ANSWER: Because UDFI applies to IRAs but not solo 401k plans when using debt financing to invest in real estate, it is more advantageous to invest in real estate through a solo 401k plan. 

QUESTION: 

My wife is currently a W-2 employee but is in the planning stages of a potential business venture; it is unclear whether she will actually generate any income this year. Does she need actual self-employment income to establish a Solo 401k and rollover existing funds? (I'm not asking about contributing new funds.) Or is intent to transact business sufficient? If you can't answer that question, I understand, but would appreciate any reference you might be able to provide to relevant IRS/DOL guidance.

ANSWER:

While it is not necessary to have a profitable business, in order to set up a solo 401(k), you must be self-employed (or pursuing self-employment) with no full-time W-2 employees working for you. Ultimately, it is going to come down to how you are compensated & report your income on your taxes. If you are compensated as a 1099 independent contractor and you are reporting self-employment activity on your taxes (e.g. on Schedule C or Line 14 on a K-1) you can set up a Solo 401k (provided you have no full-time employees working for you). 

QUESTION:

I read some articles on your blog and it looks like I can't contribute Roth IRA money to the Roth solo 401k, but could I rollover after-tax 401k money from another employer to my Self-Directed 401k. Then I could rollover that money in plan to a Roth solo 401k, possibly paying small taxes due to any gains.

ANSWER:

While the rules do not currently allow for the transfer of Roth IRAs to a Roth solo 401k (there is a pending bill that may change this, though), you can make annual voluntary after-tax contributions to a solo 401k plan based on your net self-employment income and then convert those funds to a Roth IRA or to the Roth solo 401k.

QUESTION:

I recently got married and we are putting our assets into our revocable living trust. What needs to happen in order to put this solo401k into a trust?

ANSWER:

While a solo 401k may not be deposited or invested into a living trust, you can name the living trust as the primary beneficiary of the solo 41k plan. Upon, the solo 401k participants death, the solo 401k funds will flow to the living trust through a beneficiary IRA.