Determining the Solo 401k Plan Entry Date for Non-Owner Full-Time W-2 Employees

November 17, 2023 | By Mark Nolan

QUESTION:

I have a quick question for you please about the Solo 401k plan. If the business hire employees, do we immediately become ineligible for the solo 401k or do we have a 1 year grace period?

ANSWER:

Once the W-2 employee works 12 months and 1000 hours or more for your business, the solo 401k plan will need to be converted to a full-time employer 401k (traditional 401k) or transferred to an IRA.

The First 12-month period commences on W-2 employee’s date of hire.

EXAMPLE

If your business hired Fred on November 5, 2024, Fred’s first 12-months of work for 401k eligibility purposes will be from November 5, 2024, through November 4, 2025. Therefore, if Fred works 1,000 hours or more between November 5, 2024, and November 4, 2025, he has met the 401k eligibility requirements.

The Plan Entry Date

There are 2 (two) 401k plan entry dates–January 1, and July 1.

Depending on when in the year the W-2 employee met the 12 month and 1,000 hour eligibility requirements, the solo 40k plan will need to be converted to a full-time employer 401k and offered to the W-2 employee.

Based on the above Fred example, if the solo 401k plan is not transferred to an IRA, the solo 401k plan will need to be converted to a full-time employer 401k and offered to Fred for participation by January 1, 2026 (the entry date).

The Par-Time Employee Rule Under SECURE 2.0

The solo 401k plan is also subject to the long-term, part-time employee rule as well.

One may set up a Solo 401k notwithstanding that their business has w-2 employees provided that no w-2 employees are full-time (i.e. work 1000 hours per year with 1 year of service or 500 hours per year for 3 consecutive years). Also, note that contractors in your business may be excluded from the solo 401k plan regardless of the number of hours worked.

Note: Starting in 2025, the SECURE 2.0 Act reduces the three year consecutive requirement to two years of 500 hours.