Determining if you have a ‘Solo’ Plan or a ‘Group’ Plan

Have a defined benefit plan, cash balance plan or 401(k)?

Determining whether or not you qualify for a solo plan or a group plan is very important. This will determine whether you can fund a plan for yourself only or whether you must fund the plan for your employees as well.

If you have a solo plan, your funding will be driven by IRS rules and any limitations or restrictions included in your plan document. This will give you minimal restrictions and typically offer large and flexible contributions.

But if you have a group plan, you will have to do what’s called discrimination testing. This is where your plan gets complex, limiting the amount you can fund, while also requiring you to fund the plan for your employees.

Do I qualify as a solo plan?

For most people, the definition of a solo plan is relatively simple. If you are an S-Corp, C-Corp, or sole proprietor, and you are the only person working for the company, then you will qualify as a solo plan.

If you’re a sole proprietor, you do not need to pay yourself a wage and file form W-2, but you will have to do this to be an employee under an S, Corp., or C Corp. structure.

What if my wife works for the company too?

Many small businesses are owned and operated by the owner and their spouse. If your spouse works for the company and receives a salary and form W-2, your spouse will not disqualify you from solo status.

The critical ingredient is that you are married and employed under this structure allows you to be deemed a solo plan. 

If I have employees am I automatically a group plan?

No. Fortunately, your employees will still need to meet minimum eligibility requirements to receive funding under the plan. These exclusions and limitations have been documented in your plan document.

As such, you could have employees but still qualify under the sole rules.

What are the rules to be able to exclude your employees? 

There are three main employee types that you can exclude from the plan. The following employees are excluded from participating in your plan (unless you have requested otherwise). You can exclude the following employees from your plan:

  • Employees under the age of 21. This is the age restriction.
  • You can restrict participation based on the number of hours employees work during the plan year. The company can limit the plan to only those employees that work over 1,000 hours. This is called the hours restriction.
  • Any employees who started working for the company during the year under consideration. This is the entrance date restriction.

Paul Sundin

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