How Do I Know If I Qualify for a Solo 401(k) Plan?

Solo 401(k)s are available for owners and operators of:

• Sole proprietorships
• Limited Liability Companies
• C Corporations
• S Corporations
• Limited Partnerships

Many types of people are considered “self-employed”:

• Adult Care Providers
• Architects
• Artists
• Attorneys
• B&B Operators
• Boutique Retailers
• Carpenters
• Child Care Providers
• Coaches
• Computer Repair Techs
• Consultants
• Event Planners
• Farmers
• Financial Advisors
• Fitness Trainers
• Independent Contractors
• Internet-based Sellers
• Massage Therapists
• Medical Practitioners
• Painters
• Photographers
• Psychotherapists
• Real Estate Agents
• Real Estate Developers
• Real Estate Investors
• Skilled Tradesmen
• Videographers
• Writers and Editors

Self-employment can be part-time, and it can coexist with full-time employment elsewhere. If you participate in an employer’s 401(k), you may still have your own Solo 401(k), but you are only able to contribute a maximum of $20,500 total to your accounts as “employee.” Having your own Solo 401(k) will allow you to contribute an extra $40,500 (under 50) or $47,000 (50 or older) as an “employer.”

If you earn wages, compensation, or self-employment income, you could be eligible for a Solo 401(k). The IRS has no threshold for how much profit a business can make. Rather, they will consider your business “legitimate” if it is operating with the intention of generating profits. If you fail to generate any profits over time, the 401(k) will need to be rolled over into an IRA.

Businesses with passive earnings are not eligible. This may include:

• Rental income
• K-1 distributions

You can collect rental income and still be eligible for a Solo 401(k) if your job encompasses more than simply collecting rent checks. For instance, if you screen potential tenants and arrange for contractors to complete repairs, you can qualify as “self-employed” and “Solo 401(k) eligible” by IRS standards.

Unlike other types of 401(k), you cannot have any employees if you want to open a Solo 401(k). You may have 1099 contractors, part-time workers, and volunteers who do not qualify as true employees of the business. Workers under 21 years of age are not eligible for a 401(k) plan, so they do not count as true employees for Solo 401(k) qualification purposes.

• In 2021, “full-time” employees work more than 1,000 hours per year (about 20 hours per week).
• Starting in 2024, “full-time” employees work at least 500 hours/year for three consecutive years.

There is one exception to the rule: your spouse may work full-time for your business.

You cannot open a Solo 401(k) if you are:

• Under 21 years of age.
• Working less than 1,000 hours a year.
• A union employee.
• A nonresident alien employee.

If you meet the qualifications for a Solo 401(k), Ubiquity is happy to help you set up and maintain your plan. For an initial setup charge and flat, monthly fee, we:

• Manage your contributions
• Make sure you stay within the IRS limits
• Send in Form 5500 annually once your account reaches $250,000
• Perform tasks like taking out a loan
• Disburse funds to you as distributions when you’re of retirement age

If you have any questions about your account or seek advice, we are happy to assist with that as well. Contact Ubiquity for a small business 401(k) that works for you and doesn’t cut into your retirement savings.