A solo 401k is for the working business owners and their spouses. However, if the business that sponsors the solo 41k employs non-owner W-2 employees who meet the following eligibility requirements, neither the owners of the business nor their spouses will be eligible to open or to continue with the solo 401k plan.
If the business employees non-owner W-2 employees who work 1,000 hours or more, the business cannot sponsor a solo 401k plan. What is more, if the business is currently sponsoring a solo 401k plan and one of the non-owner W-2 employees works 1,000 hours during the year, the solo 401k plan will need to be converted/restated to a full-time employer 401k plan and also offered to the now eligible full-time employee.
Starting in 2021, once the business sponsoring the solo 401k plan employs a part-time, non-owner W-2 employee (defined as 500 but less than 999 hours) who works part-time for 3 consecutive years, the solo 401k plan will need to be converted to a full-time employer 401k plan.
S-Corp Both Spouses Contribution QUESTION:
The Mega Roth might work very well for one of my clients. He is Sheriff and has a real estate S-Corp. business on the side with no employees and wants to maximize the ROTH for him and his wife. Would his wife need to be an employee to get the $57K limit for both?
As long as both spouses work in the same self-employed business, thye can both participate in the same soo 401k as the plan is sponsored by the self-employed business. Both spouse’s would base their contributions to the solo 401k on their respective W-2 wages from the business (along with other factors such as their age and whether they make contributions to another 401(k) plan such as through a “day job”).
How to Add My Spouse to the Solo 401k Plan QUESTION:
I have a solo 401k through you. I am curious how to add my spouse to my plan, so I can provide her the ability to contribute to my solo 401k?
First, if she is not yet listed on the solo 401k plan, we first need to list her on the plan documents. Second, as long as she is also working in the self-employed business that the solo 401k plan was set up for (a.k.a. the plan sponsor), she will also be eligible to make contributions to the solo 401k plan based on earned income she receives from the business. Third, she will need to open a separate participant account (brokerage or bank account) to hold her solo 401k funds under the plan. She may also need multiple holding accounts if she plans to contribute multiple sources of funds (e.g., Roth, pretax and voluntary after-tax) to the solo 401k plan. Please provide her legal name when you are ready to have us add her to the plan.
Domestic Partner Spouse QUESTION:
My 2nd employee (in addition to myself) is my domestic partner (DP; unmarried). Please confirm the spousal exclusions for 401k plan participation also applies to DPs. With the 1000 hr rule I felt I was covered assuming any challenge re DP status. Now that the rule for participation is 500 hours I'm unsure and need clarification. To be clear, she is not currently participating in the 401k?
Yes Domestic Partners are treated as spouses (see Section F(10)(c)(iii)).
Son Working Part-Time QUESTION:
We will be opening 2 accounts for Husband and wife. We have S Corp, Mortgage Company Business with one part time employee (our son), earning $16k annual, can we still open a solo 401k?
(1) If both spouses are working in the same business it will be one plan (one fee) sponsored by that same business. Each spouse’s Solo 401k funds are kept in separate sub-account(s). (2) A solo 401k plan is for an owner-only business with no full-time employees other than the owner, spouse of the owner and/or other owners and their spouses.
Therefore, you can open the Solo 401k notwithstanding that the business has hired your child as an employee provided that:
(i) your child is under 21 years of age regardless of the number of hours he/she works; OR
(ii) your child does not work more than 1000 hours per year or starting in 2021 does not work more than 500 hours per year for 3 consecutive years; OR
(iii) your child is 3% or more owner of the company regardless of the number of hours that he/she works.
Sole Proprietorship Spouse QUESTION:
The business (I am a medical doctor who moonlights as an independent contractor) and she manages my schedule, negotiates the rates, updates my CV, credentialing material, etc. I just go to work and back. If I am a sole proprietor of a business that made $200k, can I set up a solo 401k plan for both me and my wife. If so, using the IRS limits from 2023, would I be able to essentially double the $66k contribution for myself and my wife?
Since your business is a sole proprietorship, as long as your wife also works in your business and you each file a separate Schedule C, then yes you can both participate in the same solo 401k plan. Contributions to the solo 401k plan would then be based on your respective Schedule C line 31 self-employment income. Yes, provided you each have enough net self-employment income and don’t participate in any other qualified plan, you could each separately maximize the annual contribution limit which is $66,000 for 2023, for example.
Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>
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