If you’re self-employed and already have a Solo 401(k), hiring even one employee can dramatically change the rules for your retirement plan. A Solo 401(k) is specifically designed for owner-only businesses. Once your business hires qualifying employees, your plan may no longer meet the requirements to remain a Solo 401(k).
In this post, we’ll walk through the key rules, exceptions, and options you need to understand.
Watch: Determine the Impact of Hiring Employees on Your Solo 401k
Why Hiring an Employee Matters
A Solo 401(k) allows participation by:
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The business owner
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The owner’s spouse (if involved in the business)
But it excludes non-owner employees. Once you bring in a W-2 employee who meets eligibility thresholds, your plan must be terminated or converted into a full employer 401(k).
Employee Eligibility Rules
Two main rules determine whether your new hire disqualifies your Solo 401(k):
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Full-Time Employee Rule
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Any W-2 employee age 21 or older who works 1,000+ hours in 12 months must be included in your 401(k).
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Example: If you hire Fred on November 5, 2024, and he works 1,000 hours by November 4, 2025, you must offer him plan participation by January 1, 2026.
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Long-Term Part-Time Employee Rule (from SECURE Act 2.0)
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A W-2 employee age 21 or older who works 500–999 hours for two consecutive years must also be included.
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Before SECURE 2.0, the rule required three years; it’s now reduced to two.
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Who Can Be Excluded?
Not every worker counts against your Solo 401(k) eligibility. You can exclude:
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Employees under age 21
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Union employees
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Independent contractors (1099 workers, regardless of hours)
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Other business owners (Solo 401(k) is for owner-only businesses, even if multiple owners exist)
Your Options if You Hire Employees
Once your plan no longer qualifies as a Solo 401(k), you have several paths:
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Restate to a Full Employer 401(k)
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Convert your Solo 401(k) into a traditional employer-sponsored 401(k).
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All employees meeting eligibility rules must be offered participation.
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Existing Solo 401(k) assets and loans transfer into the new plan.
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Transfer to an IRA
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Roll funds into a traditional or Roth IRA (or a self-directed IRA if you hold real estate, private equity, or promissory notes).
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Requires filing a final Form 5500-EZ and a Form 1099-R with the IRS.
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SEP IRA
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Another option, but you must also extend SEP participation to eligible employees.
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Take a Distribution
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Not recommended: distributions are taxable, may be subject to state taxes, and include a 10% early withdrawal penalty if you’re under age 59½.
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Special Considerations
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Alternative Investments: If your Solo 401(k) holds real estate or private equity, assets can be transferred “in kind” to a self-directed IRA without liquidation.
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Plan Closure Requirements: You cannot just “empty the account.” Formal closure requires reporting to the IRS using Form 5500-EZ and 1099-R.
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Entry Dates: The IRS only allows January 1 or July 1 as plan entry dates for new employees—this determines when participation must begin.
Key Takeaways
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Hiring even one qualifying employee means your business no longer qualifies for a Solo 401(k).
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Both full-time and long-term part-time employees count toward eligibility.
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You have options: restate to a full employer 401(k), transfer to an IRA, or use another plan structure.
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Compliance is critical—plan termination or restatement must be handled properly with IRS filings.
Bottom line: If your business is growing and you’re planning to hire, it’s wise to review your Solo 401(k) strategy early. With proper planning, you can transition smoothly into an employer retirement plan without losing control of your retirement savings.
