What Is a Solo 401(k)?
The 401(k) plan has gained popularity among small business owners ever since 2001, when some changes to federal tax law made it a better and more flexible choice for their needs compared with some other retirement savings options. These 401(k) plans are known as solo 401(k) or self-employed 401(k) plans.
- A solo 401(k) plan—also called a self-employed 401(k)—is for businesses whose only eligible participants in the plan are its owners (and spouses).
- These plans are often less complicated and cost less to set-up.
- If you have non-owner employees, they must not meet the eligibility requirements you select for the plan.
- There are two components to a solo 401(k) plan: employee elective-deferral contributions and profit-sharing contributions.
- A solo 401(k)s may also offer loans, doesn’t require nondiscrimination testing, and allows for the deduction of plan contributions of up to 25% of eligible compensation.
How the Solo 401(k) Works
Solo 401(k)s are a retirement savings option for small businesses whose only eligible participants in the plan are the business owners (and their spouses if they are also employed by the business). It can be a smart way for someone who is a sole proprietor or an independent contractor to set aside a decent-sized nest egg for retirement.
Not content with the federal acronym, various financial institutions have their own names for the solo 401(k) plan. The independent 401(k) is one of the most generic. Other examples include:
- The Individual(k)
- Solo 401(k) or Solo-k
- Uni-k Plan
- One-Participant k
- Self-Employed 401(k)
If you are not sure which name your financial service provider uses, ask about the 401(k) plan for small business owners. The IRS provides a handy primer on such plans.
Who Is Eligible for Solo 401(k) Plans?
A common misconception about the solo 401(k) is that it can be used only by sole proprietors. In fact, the solo 401(k) plan may be used by any small businesses, including corporations, limited liability companies (LLCs), and partnerships. The only limitation is that the only eligible plan participants are the business owners and their spouses, provided they are employed by the business.
A person who works for one company (in which they have no ownership) and participates in its 401(k) can also establish a solo 401(k) for a small business they run on the side, funding it with earnings from that venture. However, the aggregate annual contributions to both plans cannot collectively exceed the Internal Revenue Service (IRS)-established maximums.
How to Set Up a Solo 401(k) Plan
For small business owners who meet certain requirements, most financial institutions that offer retirement plan products have developed truncated versions of the regular 401(k) plan for use by business owners who want to adopt the solo 401(k).
As a result, less-complex documentation is needed to establish the plan. Fees may also be relatively low. Make sure to receive the proper documentation from your financial services provider.
As noted above, the solo 401(k) plan may be adopted only by businesses in which the only employees eligible to participate in the plan are the business owners and eligible spouses. For eligibility purposes, a spouse is considered an owner of the business, so if a spouse is employed by the business, you are still eligible to adopt the solo 401(k).
If your business has non-owner employees who are eligible to participate in the plan, your business may not adopt the solo 401(k) plan. Therefore, if you have non-owner employees, they must not meet the eligibility requirements you select for the plan, which must remain within the following limitations.
You may exclude nonresident aliens from a solo 401(k) who receive no U.S. income and those who receive benefits under a collective-bargaining agreement.
Solo 401(k) Eligibility Requirements
Setting the wrong eligibility requirements could result in you being excluded from the plan or non-owner employees being eligible to participate in the plan.
For example, say you elect zero years of service as a requirement to participate, but you have five seasonal employees who work fewer than 1,000 hours each year. These employees would be eligible to participate in the plan because they meet the age and service requirements. Consequently, their eligibility would disqualify your business from being suitable to adopt the solo 401(k) plan. Instead, you could adopt a regular 401(k) plan.
Some solo 401(k) products, by definition, require further exclusions. Before you decide to establish a solo 401(k) plan, be sure to check with your financial services provider regarding its provisions.
For 401(k) employee elective-deferral contributions you may require an employee to perform one year of service before becoming eligible to make elective-deferral contributions.
For profit-sharing contributions you may require an employee to perform up to two years of service in order to be eligible to receive profit-sharing contributions. However, most solo 401(k) plans will limit this requirement to one year.
For plan purposes an employee is considered to have performed one year of service if they work at least 1,000 hours during the year. While you may generally choose to require fewer than 1,000 hours under a regular qualified plan, most solo 401(k) plans include a hard-coded limit of 1,000 hours.
Solo 401(k) Contribution Limits
There are two components to the solo 401(k) plan: employee elective-deferral contributions and profit-sharing contributions.
Employee Contribution Limits
You may make a salary-deferral contribution of up to 100% of your compensation but no more than the annual limit for the year. For 2022, the limit is $20,500 (increasing to $22,500 for 2023), plus $6,500 for people age 50 or over (increasing to $7,500 for 2023).
Employer Contribution Limits
The business may contribute up to 25% of your compensation (20% in the case of a sole proprietor or a Schedule C taxpayer) but no more than $61,000 for 2022 ($66,000 for 2023). An employee age 50 or above can still contribute an additional $6,500 for 2022 or $7,500 for 2023.
Other 401(k) Plans
In comparison with other popular retirement plans, the solo 401(k) plan has high contribution limits as outlined above, which is the key component that attracts owners of small businesses. Some other retirement plans also limit the contributions by employers or set lower limits on salary-deferred contributions.
The following is a summary of contribution comparisons for the employer plans generally used by small businesses.
|Account||Elective Deferral||Maximum Employer Contribution||Catch-Up Contribution|
|Solo 401(k)||$20,500 for 2022
$22,500 for 2023
|25% of compensation or 20% in the case of a sole proprietor or a Schedule C taxpayer||$6,500 for 2022
$7,500 for 2023
|SEP IRA||Not Allowed||25% of compensation or 20% of modified net profit for unincorporated business owners||Not Allowed|
|Profit-Sharing or Money-Purchase Pension Plan||Not Allowed||25% of compensation or 20% of modified net profit for unincorporated business owners||Not Allowed|
|SIMPLE IRA||$14,000 for 2022
$15,500 for 2023
|3% of compensation/income||$3,000 for 2022
$3,500 for 2023
As mentioned earlier, you may make employee elective-deferral contributions of up to 100% of your compensation but no more than the elective-deferral limit for the year. Profit-sharing contributions are limited to 25% of your compensation (or 20% of your modified net profit if your business is a sole proprietorship or partnership).
The total solo 401(k) contribution is the employee elective-deferral contribution plus the profit-sharing contribution—up to $61,000 for 2022.
If your business is a corporation, the profit-sharing contribution is based on W-2 wages you receive. If you receive $70,000 in W-2 wages, for instance, your profit-sharing contribution could be up to $17,500 ($70,000 x 25%). When added to a salary-deferral contribution of $19,000, the total would be $36,500.
If your business is a sole proprietorship or partnership, the calculation gets a little more involved. In this case, your profit-sharing contribution is based on your modified net profit and is limited to 20%. The IRS provides a step-by-step formula for determining your modified net profit in IRS Publication 560.
Other Benefits of a Solo 401(k)
There are a number of other benefits that come with the Solo 401(k).
As with other qualified plans, you may be able to borrow from the solo 401(k) up to (1) the greater of $10,000 or 50% of the balance or (2) $50,000, whichever is less. Check the plan document to determine if any other limitations apply.
5500 Filing May Not Be Required
Because the plan covers only the business owner, you may not be required to file Form 5500 series return unless your balance exceeds $250,000.
No Nondiscrimination Testing
Generally, certain nondiscrimination testing must be performed for 401(k) plans. These tests ensure that the business owners and higher-paid employees do not receive an inequitably high amount of contribution when compared with lower-paid employees.
Such tests can be very complex and may require the services of an experienced plan administrator, which can be costly. Because the solo 401(k) plan covers only the business owner, there is no one against whom you can discriminate, so these tests are not required.
Similar to other employer plans, the solo 401(k) allows you to deduct plan contributions of up to 25% of eligible compensation. For plan purposes, compensation is limited to $305,000 in 2022 and $330,000 in 2023. Earnings over that amount are disregarded for plan purposes.
Can I Have a 401(k) for My LLC?
Yes, any business is able to set up a 401(k). If you are self-employed, you can create a solo 401(k) as a limited liability company (LLC)—assuming you meet all the other eligibility requirements.
What Is the Minimum Number of Employees Needed for a 401(k)?
A business of any size can offer a 401(k) plan. A solo 401(k) is for business owners with no employees.
How Much Can a Small Business Owner Contribute to a 401(k)?
The maximum contribution for a small business owner to a 401(k) for 2022 is $61,000 ($67,500 if you’re 50 or older)—which includes contributions as the employee and employer. For 2023, the contribution limit is $66,000, and $73,500 if you are 50 or older.
The Bottom Line
If you own more than one business, you must check with your tax professional to determine whether you are eligible to adopt the solo 401(k). Ownership in another business that covers employees other than the business owner could result in your being ineligible for this type of plan.
Internal Revenue Service. "One-Participant 401(k) Plans."
Internal Revenue Service. "Retirement Topics - 401(k) and Profit-Sharing Plan Contribution Limits."
Internal Revenue Service. "Retirement Plans FAQs Regarding Loans."
Internal Revenue Service. “401(k) limit increases to $22,500 for 2023, IRA limit rises to $6,500.”
Internal Revenue Service. "Retirement Plans for Self-Employed People."
Internal Revenue Service. “2022 Limitations Adjusted as Provided in Section 415(d), etc.”
Internal Revenue Service. "Publication 560 (2020), Retirement Plans for Small Business."
U.S. Department of Labor Employee Benefits Security Administration. "Form 5500 Series."
Internal Revenue Service. "Retirement Topics -- 401(k) and Profit-Sharing Plan Contribution Limits."
Internal Revenue Service. "401(k) Plans - Deferrals and matching when compensation exceeds the annual limit."
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