Solo 401k employer now has an employee

Submitted by Vickie Intriago on Thu, 2023-04-13 06:34

Client has been funding his SOLO 401k but now has employees.

Is there a 1 year grace period between client hiring his first employee? When can he no longer use his Solo 401k for the business?
If there is a 1 year grace period, is it a calendar year, fiscal year or a year to the date of hiring?

Thanks



Submitted by Vickie Intriago on Thu, 2023-04-13 20:46

Above said employees were hired May 16, 2022 and August 2, 2022 



Submitted by William Tuttle on Thu, 2023-04-13 21:57

  • The IRS allows limited 401k employee eligibility restrictions:
  • < age 21
  • Length of service
  • >= 1 year and >= 1,000 hours/year
  • >= 2 years* and >= 500 hours/year. 3 years were established by the TCJA, but reduced to 2 years by the SECURE Act 2.0 before it took effect.
  • All the mainstream one-participant 401k plan providers except Vanguard allow the election of some or all of these restrictions
  • The restrictions must have been elected by the original adoption agreement or amended before the employees were hired.
  • If no such election was made, the client became ineligible to made one-participant 401k contribution on 5/16/22. If any contributions were made on or after that date. They are excess contributions and must be removed with earnings.
  • If elections were made, the employees will become eligible based on the elections above. E.g If they are both >= age 21 and have worked >= 1,000 hours by their 1 year anniversary.
  • If there were no elections or when any non-owner/spouse employee becomes eligible. The one-participant 401k plan must be terminated and rolled over or the plan must be amended to an ERISA 401k plan covering non-owner/spouse employees.

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