Question: My partners & I have a consulting business that is organized as an S-corporation. Are we eligible to set up an Individual Solo 401k plan for our business?
Answer: A Solo 401k plan is a 401k plan for owner-only businesses with no full-time w-2 employees (other than the owner(s)). The IRS clearly recognizes that an S-corporation can sponsor a Solo 401k (otherwise known as an Individual 401k or self-directed 401k). For example, on the page of the IRS website dedicated to “one participant plans” (which is the technical term for a Solo 401k plan) the IRS describes a hypothetical scenario involving a Solo 401k sponsored by an S-corporation in order to explain how contribution limits apply to a Solo 401k plan. Therefore, the clear implication is that the IRS acknowledges that an S-corporation can sponsor a Solo 401k. For an S-corporation with multiple owners, each owner must own greater than 2% of the outstanding stock of the S-corporation (See IRC Section 1372). Therefore, your S-corporation can open a Solo 401k plan as long as each of you own greater than 2% of the outstanding shares of the S-corporation and there are no full-time common law employees w-2 employees of the S-corporation.
Employee Director QUESTION:
Is the non-profit setup as a corporation? That appears to be the case since an employee is a director. If yes, then the director must own greater than 2% of the outstanding stock of the S-corporation. Otherwise, corporation will not be able to sponsor as solo 401k because a solo 401k is for owner-only businesses.