Attorney · Claremore, OK · Member since 2013 · 125 posts · 61 votes
I have a business with no employees for which I want to establish a solo 401k. I have another unrelated business with one full time employee. My wife has a business with four full time employees. Under the Controlled Group Rules I guess that I am unable to establish a solo 401k in the business with no employees because I am deemed to own 100% of my business with an employee and my wife's business. Is there anyway the business with no employees can establish a 401k?
I see the benefit of a 401k to me in avoiding UDFI tax, not really for the tax deductions. I have an IRA that I could role over to fund the 401k.
If I can't form a solo 401k, are there any affordable 401k plans for small businesses?
That is a totally unrelated concept. What we have been discussing here is the qualification for establishing a Solo 401k plan, which is an owner-only business format with no full time employees.
A 401k could invest in a business where someone who is not a disqualified party to the 401k in any way is providing property management services, and there would be no conflict with that same business providing property management services for plan-owned property.
The problem, however, is that property management services are going to generate trade or business income, and the earnings that the 401k derives from that property management business would then likely be subject to UBIT taxation.
You are correct that there is a control group issue and there is no avenue to establish a Solo 401(k) for you.
An ERISA 401(k) offering employee coverage such as a safe harbor 401(k) would be an option, but self-directing such a vehicle is generally complex, expensive, and very limiting as to what portion of plan funds can be placed in non-traditional assets.
A self-directed IRA would be your best option. Avoiding UDFI is nice when possible, but it really does not add up to that much in the grand scheme of things, and you still very much get the benefits of higher cash-on-cash return through leverage even under an IRA subject to UDFI.
@Brian Eastman Can you clarify one other thing while discussing Solo 401K. Can your Solo 401K be a minority equity investor with less than 50% equity in other businesses that DO have employees as long as you don't personally have any control and do not personally work within that entity. For example, could the 401K be a minority non-managing member of a property management company that also is hired to manage properties owned by the 401K? Again, I understand you couldn't personally be involved in the PM Co in any way.
That is a totally unrelated concept. What we have been discussing here is the qualification for establishing a Solo 401k plan, which is an owner-only business format with no full time employees.
A 401k could invest in a business where someone who is not a disqualified party to the 401k in any way is providing property management services, and there would be no conflict with that same business providing property management services for plan-owned property.
The problem, however, is that property management services are going to generate trade or business income, and the earnings that the 401k derives from that property management business would then likely be subject to UBIT taxation.
1. Parent-subsidiaryA parent-subsidiary controlled group exists when one or more chains of corporations are connected through stock ownership with a common parent corporation; and:
80% of the stock of each corporation, (except the common parent) is owned by one or more corporations in the group; and
Parent corporation must own 80% of at least one other corporation.
2. Brother-SisterA brother-sister controlled group is a group of two or more corporations, in which five or fewer common owners own directly or indirectly a controlling interest of each group and have “effective control”.3. Combined. A combination of: parent-subsidiary and brother-sisterA combined group consists of three or more organizations that are organized as follows:
Each organization is a member of either a parent-subsidiary or brother-sister group; and
At least one corporation is the common parent of a parent-subsidiary; and is also a member of a brother-sister group.
You need to make sure that any other business that you own that has full-time W-2 employees besides owners and their spouses do not fall under the controlled group rules as this will not qualify you to open a solo 401k for your other business (the one with no W-2 employees).
The controlled group rules will also preclude you from setting up separate plans for each business because if you own and operate more than one business both businesses will need to be covered by the same retirement plan.
@Brian Eastman Does the Control Group rule work in reverse. If I already have a two member LLC w/no employees (in business for 2 years) and Solo 401(k) plan established w this LLC for almost 2 years, and then I wish to form a subsidiary business entity that intends to hire employees. As soon as I hire an employee with the subsidiary business, am I required to terminate my established solo 401(k) plan with the parent company?
Thanks @George Blower. Really makes you reconsider hiring W2 employees. Glad I did the research before making this mistake.
Just to be sure, I'm taxed as an S-corp so my partner and I are W2 salaried employees of the company, in addition to being managing members. This still fits within the Solo 401k rules, correct?
To resurrect this topic and for me to think in the theoretical...I'm wondering if someone can bring more clarity to this topic.
Let's say I own 78% of Company A and business partner 1 owns the other 22% of Company A. Company A is an engineering firm with multiple full-time W2 employees. Company A offers a SEP ira plan to the employees. I am also the CEO and president of Company A.
I start company B with four other business partners with an even 25% split stake in the Company B. Company B is a consulting business with no other full-time employees other than the business partners. See that each business partner are the only employees we have chosen to have Company B sponsor a solo 401k plan.
Is this all correct? Or am I violating a control group rule (parent-subsidiary, brother-sister, or combined)? Do these percentages matter at all?