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How to choose a business to adopt your 401k plan
How to choose a business to adopt your 401k plan
Updated over 2 years ago

If you have more than one business that you own, the following can help you choose which one you use to adopt your 401k plan.

The business must have no full time, non-owner W2 employees. In fact, if you have any full time, non-owner employees that receive a W-2 in any businesses that you or your spouse own 100%, you are not eligible for a Solo 401k at all. This is true even if you have other businesses that do no have any employees.

  • Part time employees (W-2 employees who work fewer than 1,000 hours per year) do not affect Solo 401k eligibility

  • Independent contractors (workers who appropriately receive a 1099 instead of a W-2) do not affect Solo 401k eligibility

  • Other business owners who work for the company (such as your spouse) are also acceptable when determining Solo 401k eligibility.

Contributions to the 401k plan must come from earned income from the adopting employer. This is an important consideration. If you have a business that generates a lot of passive income, but no earned income, you will not be able to make contributions to any retirement plan, including the Solo 401k, from that business.

Adopting your Solo 401k plan with the business that provides you with the largest amount of earned income will maximize the contributions you can make to the plan.

Remember, you can adopt the Solo 401k with any entity type such as a sole proprietorship, a corporation, or an LLC. You do not have to have an established LLC or corporation to adopt the Solo 401k plan. If, for instance, you have an LLC that holds rental properties and generates very little earned income but you also work as an independent contractor as your main source of income, you can adopt the plan as a sole proprietor and make contributions based on your 1099 income.

I have a few businesses. Which should adopt the Solo 401k?

Generally it’s best to sponsor your Solo 401k plan using the business that generates the most self-employment profit because that will provide for the largest contributions into your Solo 401k (and the largest tax benefits!).

If you would like the income from multiple businesses to be aggregated for Solo 401k contribution purposes, then you should consider having one entity as a holding company (such as an LLC) that will own the other businesses. Then by adopting your Solo 401k with the holding company business, the profit of the multiple businesses will flow up to the holding company and you may maximize your Solo 401k contributions.

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