Solo 401K with ineligible employees

Submitted by Raghu Akkapeddi on Sun, 2015-05-17 02:59

Hello,
Can someone help me out with this situation with my Solo 401K.

I opened a LLC in May 2012. I established a Solo 401K immediately since it was just me listed as an employee. When I opened the 401K platform with Fidelity, I listed that only employees with 1 year service are eligible to participate in the plan.

So 3 years later, I started hiring employees. I hired 3 employees in the past couple of months and here is the problem. Am I not eligible to contribute to my 401K effective immediately since I hired employees or do I have until next March 23, 2016 (I hired my employee on 3/23/15) to run into this problem?

If I cannot contribute to Solo 401K this year, I will run into a problem of not as much tax sheltered space as my other option right now is SIMPLE IRA.

Can anyone point me to the exact IRS publication that guides me in this situation?

Thank you.



Submitted by Raghu Akkapeddi on Wed, 2015-05-20 02:23

Wow. Didn’t mean to stump everybody with my question :). Based on other research from the internet, looks like I can contribute to my Solo 401K plan with employees for this year (2015) since my employees are not eligible until next March (March 201.If any CPAs on the forum disagree, I would appreciate their thoughts.Thank you.

Submitted by Alan - IRA critic on Wed, 2015-05-20 03:05

From 401k helpcenter.com

When Your Business ExpandsThe Solo 401k is designed for self-employed individuals and their spouses or partners. Only businesses without any full time employees are qualified for the plan. It is ok for a sponsoring business to have part time employees who work less than 1000 hours a year each.If your business hires a full time employee, you will no longer meet the eligibility requirement for a Solo 401k plan. This means changes need to be made.When your business hires a full time employee (other than you and your spouse) you have the option of keeping the plan by making it “frozen.” This means you can leave the Solo 401k open, but you can no longer contribute to the plan. Alternatively, you can also choose to rollover the funds to another retirement plan and close the Solo 401k plan completely.If you choose to close the Solo 401k plan, you will also need to report this to the IRS by filing the final 5500-EZ form.

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