Your spouse is the one exception to the one employee rule.
My spouse and I work for the same small business... can we both use the same Solo 401(k)?
Yes! Your spouse is the only exception to the no employee rule of the Solo 401(k). If you both take taxable income from the same business, you can both contribute to one solo 401(k) plan, with the two participants.
If you both take income from the same sole proprietorship, your spouse can make equal contributions. This would mean all the taxable income would be run through one person and sole-proprietorship.
How does this work if both my spouses and I use the same Solo 401(k)?
You can purchase one Rocket Dollar account and select the Solo 401(k). When you are creating your trust bank accounts, you can make one for each of your contributions. It is not necessary to make all four, but it is at least necessary to have two accounts. One for each spouse.
- Wife - Traditional
- Wife - Roth
- Husband - Traditional
- Husband - Roth
Testing in a one-participant 401(k) plan
If you don't have any common law (W-2) employees, you don't have to do any eligibility testing. You can still have 1099 employees. Even if your W-2 employees are not interested in a retirement plan, they may be "eligible" for a retirement plan and you cannot use a Solo 401(k)!
A one-participant 401(k) plan is generally required to file an annual report on Form 5500-SF if it has $250,000 or more in assets at the end of the year. A one-participant plan with fewer assets may be exempt from the annual filing requirement.
What employees can I exclude from a Self-Directed Solo 401(k)?
- Employees under 21 years of age
- Employees that work less than a 1,000 hours annually
- Correctly classified 1099 contractors
- Union employees
- Nonresident alien employees
I have or will soon have full-time W-2 employees. What happens to my Self-Directed Solo 401(k)?
- You need to stop contributions. Your company plan is no longer eligible for a Solo 401(k).
- You will need to rollover your self-directed Solo 401(k) to a Self-Directed IRA or Self-Directed SEP-IRA within one year.
- Rocket Dollar can assist you in rolling over your self-directed 401(k) account to a Self-Directed IRA OR a Self-Directed SEP-IRA Please call us at 1(855)ROCKET-D
What happens if I made a mistake in classifying an employee?
- If your employee should have been eligible for a retirement plan, you might need to correct the mistake, and possibly offer the employee a contribution called a corrective QNEC (qualified non-elective contribution). Because you are using a Solo 401(k), this can be difficult! Your employee can't be included into a retirement plan set up for one person, and you would have to create a new retirement plan solution.
- The longer you delay in correctly classifying an employee, the larger the penalty can be! Be sure to hire and plan carefully...
How do I avoid mistakes with my employee classification?
Keep close track of important employee data and standards!
- Dates of Birth
- Hire and Termination
- Number of hours worked
- Compensation for the year
Here is a helpful article to help define what makes a full time W-2 employee and a 1099 contractor.