When a Solo 401(k) Must Convert to a 401(k) Plan Designed for Employees

By Stuart Robertson

Solo 401(k) plans are designed for the self-employed and owner-only businesses. If you have a company with multiple owners and no employees and/or a spouse, this is a great option. But if you grow and add employees, that’s the sign you will need to convert to a 401(k) plan type that supports employees.

Things to know:

  • If you have employees that are either full-time or are part-time and working over 1,000 hours per year, you will need to convert.
  • If you only have part-time employees that work at least 500 hours per year (but less than 1,000) and have reached 21 years of age, you may wait 3 years before converting.
  • Depending on your plan document, you often will have until the next fiscal or calendar year to make the conversion and enable your employee(s) to join the plan. If your plan allows for immediate eligibility, you may need to act faster. Most solo 401(k) plan docs should be set at a one-year of work required for eligibility which provides you the time needed to convert.

To convert, you will need to contact your provider and let them know you have employees, and they will amend your plan and begin the process. To manage it well, it’s good to at least give a few months heads up to your provider.

This also gives you time to learn plan design differences and determine the best plan type that will meet your needs. Do you want to match or not? What are the implications? What tax deductions and credits will you be eligible? FYI, the tax deductions and credits are attractive.

What happens if you run a Solo 401(k) when you have eligible employees?
If you “break” the regulations, knowingly or not, you can be subject to a fine, but you at least will be required to take corrective action. Corrective action usually requires you to provide 50% of the average deferral percentage you (and other owners/spouses if applicable) multiplied by the employee’s salary to each employee that should have been eligible.

Hope this helps you as you plan for your business and a healthy retirement down the road.

Meet the Author

Our low-cost 401k plans are easy to setup online and are supported by our 401k advisors and specialists. ShareBuilder 401k serves small business and medium-sized companies, as well as the self-employed. We offer Roth 401k, Safe Harbor 401k, Traditional 401k, and Solo 401k options. Your 401k plan is paired with investment management expertise and employee education to help you save more.