Solo 401k

Submitted by Darlene Lukaszewicz on Mon, 2019-09-30 14:25

Client has LLC rental Income Company both he and his spouse are members
Sub S Corp construction company he is the solo employee
Sub S Corp with a Part Time Seasonal Employee works 40 hours a week 4 mos a year

Can he set up a solo 401k for the Sub S construction company where he is the solo employee and nothing for the LLC and the other Sub S?

Thanks.



Submitted by David Mertz on Mon, 2019-09-30 22:05

No.  For the purpose of a retirement plan these three businesses must be treated as a single employer because they are a controlled group due to having common ownership.  (For this purpose the client is considered to be 100% owner of the LLC rental income company due to attribution rules.)  Any retirement plan must include all eligible employees from all three businesses.  Because one of the S corps has an employee, a 401(k) plan covering these businesses cannot be a solo 401(k) plan.



Submitted by William Tuttle on Mon, 2019-09-30 22:47

  • Rental income is in of itself not self-employemnt income reported on Schedule C and not subject to SE taxes. Rental income is almost always considered investment income reported on Schedule E and not compensation eleigible for retirement contributions. With no employee compensation this is not part of any controlled group.
  • The S-Corp construction business and the S-Corp employing seasonal employees are part of a controlled group.
  • With the exception of Vanguard; Etrade, Fidelity, Schwab and TD Ameritrade one-participant 401k adoption agreements all allow employee eligibility restrictions under 410(a) Minimum Participation Standards. You can require employees to be >= age 21 and have one (1) year of service with >= 1,000 hours, before they are eligible to participate. A full-time individual working four months will only have ~700 hours/year.
  • This means that you can exclude your seasonal workers from participation. No eligible non-owner/non-spouse employees means you may be eligible for a one-participant 401k.
  • One caveat, even though it is unlikely. Since you didn’t adopt the plan before you had non-owner/non-spouse employees, you can not exempt current employees (particularly yourself). The one year of service and 1,000 hours applies to you also. If you did not have >= 1,000 hours in the last year, you would not be eligible either.


Submitted by David Mertz on Tue, 2019-10-01 00:25

All good points by spiritrider.  It seems reasonable that a one-participant 401(k) would be permitted if the employee is excludible, but the IRS webpage on the subject only makes mention of having employees, without regard to whether the employees are excludible.  That IRS webpage apparently has other inaccuracies as well:  https://www.irs.gov/retirement-plans/one-participant-401k-plans



Submitted by William Tuttle on Tue, 2019-10-01 02:14

This link like many other IRS webpages use imprecise sloppy language.



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