A solo 401(k) plan is a traditional 401(k) plan that covers business owners and spouses with no eligible employees. A solo 401(k) can be advantageous for these individuals who would like to contribute above the limits of a personal IRA.
Who is an eligible employee?
Employees aged 21 and over become eligible to participate in the plan on the semi-annual entry date (1/1 or 7/1) following 12 months of service in which they work at least 1,000 hours. Once there are eligible employees, the plan is no longer considered a solo 401(k).
Example: An employee aged 25 is hired on 3/10/20 and works 30 hours per week from 3/10/20 to 3/10/21. Since the employee worked over 1,000 hours in this 12-month period (1,560 hours), this employee becomes eligible to participate on the next Plan entry date of 7/1/21.
How much can you contribute to a solo 401(k)?
Contributions can be made as employee deferrals and employer contributions.
Maximum annual deferral contribution: the lesser of the plan year’s 401(k) elective deferral limit or 100% of compensation.
Catch-up deferrals are permitted if employee is age 50 or older anytime in the plan year.
| ||401(k) Deferral Limit||Age-50 Catch-Up Limit|
Maximum annual employer contribution: 20% of Schedule C / K-1 income or 25% of W-2 Income
The total annual contributions (deferral + employer) not including the age-50 catch-up is:
| ||Total Defined Contribution Limit|
See our Annual Plan Limits Chart for additional limits.
In order to deduct a contribution for a given year, it must be deposited by the due date (including extensions) of the company tax return. However, if your business entity is a corporation (C- or S-), 401(k) contributions must be withheld from W-2 wages before the end of the calendar year.
Required Minimum Distributions (RMDs)
You are eligible to receive an RMD if you are 72 years of age or older by year-end and you are either a) no longer employed by the organization sponsoring your Plan, or b) are a five or more percent owner of the organization or are related to a five or more percent owner of the organization (your spouse, child or parent). You are required to receive your RMD by December 31st each year that you are eligible for one. You may defer your very first RMD until April 1st the following year. However, you will be required to take two RMDs the following year, one by April 1st and one by December 31st.
Establish the account(s) at a financial institution to manage the investments and set up an IRS approved plan document.
A Plan Tax Return (Form 5500) is required once combined assets across all plans sponsored by the employer exceed $250,000. As there are no eligible employees, a solo 401(k) is not subject to nondiscrimination testing.
RPG Consultants offers Plan Document services and the monitoring of Solo 401(k) plans to make certain they are complying with IRS and DOL regulations.