Can I have a Solo 401(k) if I have employees?

In order to have a solo 401(k), a business owner cannot have employees. Some business owners attempt to circumvent the rules by creating multiple entities, only one of which may have employment contracts. The thought is that the separate entities can house the Solo 401(k) since they don’t have employees.

Unfortunately, the business owner would need to adhere to the controlled group and affiliated service group rules which aggregates all entities together and treats them as one corporation. If the business owner can structure their entities in a manner in which their separate entities are not included in the controlled group, then the business owner can set up a Solo 401(k) in that separate entity.

HALL_002_CTA - Lead magnet

The affiliated service group rules are extremely broad and can trigger the controlled group rules in many unexpected cases. For this reason, it is extremely important to work with a trained tax and ERISA professionals to determine whether the affiliated service group rules would trigger the controlled group rules and, hence, prevent the adoption of a solo 401(k) Plan or activate the need to offer plan benefits to certain employees. In other words, if the affiliated service rules are violated, the controlled group rules would apply and can prevent a business owner from adopting a solo 401(k) Plan due to employees from an affiliated owned company.

Have questions?
Our Tax Smart Investor Plus subscription includes Live Q&As where you can get your questions answered by our seasoned tax experts.