What is a professional employer organization (PEO) and can it be excluded from a self-directed solo 401k?

February 6, 2025 | By Mark Nolan

QUESTION:

I’m reaching out to inquire about the eligibility of a client’s business for a Solo 401(k) plan for 2024.

The business is structured as an S-Corp, with the husband as the sole owner. Both he and his wife are employed by the company and receive W-2s. All other workers are either 1099 contractors or paid through a PEO. The company’s net profit for 2024 is estimated to be over $2 million. Can you confirm whether a Solo 401(k) would be allowed for this client, given these circumstances?

ANSWER:

Yes, PEO employees can be excluded from participating in a Solo 401k plan. The Solo 401k rules allow for the exclusion of certain employees, including PEO employees, from participating in the plan.

What is the PEO?

A PEO is sometimes referred to as an employee leasing organization. The contract between the PEO and the employer will provide that the PEO will perform some or all of the employment tax withholding, reporting and payment activities related to workers performing services for the employer. In some cases, the employer who contracts with a PEO purports to fire its employees, who are allegedly then hired by the PEO and leased back to the CLE (the PEO’s client). The PEO pays the employees as well as the employment tax liabilities with funds received from the client and files employment tax returns using its (the PEO’s) EIN. Typically, the client remains the CLE and the PEO is not the Section 3401(d)(1) employer because it does not control the payment of wages.