Can an S Corporation Have an Individual 401k?

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:

My client is a nonprofit organization with only one employee who is also the director. Can a solo 401K be set up so she can contribute to the solo 401k?

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.

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About George Blower

I have the privilege of educating our clients about our products and services so that they can make informed and confident decisions about their financial future. Prior to joining My Solo 401k Financial, I served as the general counsel for a subsidiary of a Fortune 500 financial services company. Learn more about George Blower and My Solo 401k Financial >>


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