Solo 401(k) eligibility
Last updated August 2026
Short answer
The eligibility test is about who else is in the business rather than about how the business is structured, which is the opposite of what most people assume.
What qualifies you
Net earnings from self-employment, or W-2 wages from your own corporation. Either is enough to support contributions.
Any entity type works, and no separate legal structure is required. A sole proprietor with a 1099 income stream is eligible.
An EIN is generally needed for the plan, and it takes minutes to obtain from the IRS at no cost.
Side income counts
A full-time employee with consulting income can open a Solo 401(k) for that business.
The employee deferral limit is shared with the day job's plan, so if that is already maxed there is no deferral room left.
The employer contribution from the side business is separate and unaffected, which is the reason this arrangement is worth setting up at all.
What ends it
Hiring anyone who satisfies the plan's eligibility conditions, generally age 21 with a year of service.
At that point the plan is a conventional 401(k) with nondiscrimination testing, Form 5500 filing and coverage obligations.
Planning ahead matters, because discovering this after the fact means correcting a plan that has been operating incorrectly.
Try it in Walnut
Walnut connects to your brokerage, including a Solo 401(k) at a mainstream custodian, and reads it with your other accounts.
Part-time staff and long-term part-time rules
Plans must now admit employees who work enough hours across consecutive years, even without a full year of service in the traditional sense.
Structuring hiring to keep everyone part-time is therefore no longer a reliable way to preserve owner-only status.
Where the business is growing, a SIMPLE IRA or a conventional 401(k) is usually the honest answer rather than an eligibility workaround.
The controlled group trap
Businesses under common ownership can be treated as a single employer for retirement plan purposes.
Someone with a consulting practice and a majority stake in a company with staff may find those employees have to be covered.
The rules on affiliated service groups and attribution between family members are intricate, and this is one of the few areas where professional advice reliably pays for itself.
Keeping the plan compliant
Form 5500-EZ becomes due once plan assets exceed $250,000 at year end, and on termination whatever the balance.
Missing filings carry penalties, though the IRS operates a relief program for one-participant plans that qualify.
The plan document also has to be kept current with legislative changes, which providers generally handle but which remains the sponsor's responsibility.
Sources
Eligibility for one-participant plans, including the effect of hiring employees, is published by the IRS at One-participant 401(k) plans, with plan requirements and contribution rules in Publication 560. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax advice.
FAQ
Who is eligible for a Solo 401(k)?
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A business with no employees other than the owner, and a spouse who works in the business. It covers sole proprietors, single-member LLCs, partnerships and corporations, provided nobody else meets the plan's eligibility conditions.
Do I need an LLC or a corporation?
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No. A sole proprietor with self-employment income can open one, and you do not need a separate legal entity. An EIN is generally required, and it is free to obtain from the IRS.
Does freelance side income qualify?
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Yes, if you have net earnings from self-employment. Someone with a full-time job and consulting income can open a Solo 401(k) for the consulting business, and the employer contribution is separate from the day job's plan.
What happens if I hire someone?
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Once an employee meets the plan's eligibility conditions, generally age 21 and a year of service, the plan is no longer owner-only. It becomes a conventional 401(k) with nondiscrimination testing and Form 5500 filing, or it has to be terminated.
Can I exclude part-time staff?
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Less than you used to. Long-term part-time rules now require plans to admit employees who work enough hours across consecutive years, so relying on part-time status to preserve solo eligibility is no longer safe.
What is the controlled group rule?
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If you own or partly own more than one business, they can be treated as a single employer, meaning employees of the other business may have to be covered. It is a common trap for owners with a second venture and worth professional advice.
Can my spouse participate?
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Yes, if they genuinely work in the business and are compensated. They defer their own amount and receive their own employer contribution, which roughly doubles the household's capacity.
Do independent contractors I pay count as employees?
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Not if they are genuinely contractors. Misclassification is the risk: someone treated as a contractor who is legally an employee could be an eligible participant, which would end the plan's owner-only status retroactively.
When do I have to file Form 5500-EZ?
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Once plan assets exceed $250,000 at year end, and on termination whatever the balance. Missing filings carry penalties, though the IRS operates a relief program for one-participant plans that qualify.
Does a spouse count as an employee?
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Not for the purpose of ending solo status. A spouse working in the business can participate in the plan, deferring their own amount and receiving their own employer contribution, which is why the plan is often described as owner-and-spouse.