What’s This I Hear About Solo 401(k) Plans?
By Mike Rahn, CISP
Our independent business clients are increasingly asking whether we offer “solo(k)” plans. We do have 401(k) resources available, but it’s unclear to us whether this is a different kind of retirement plan, or how it might work. We’d like to be better equipped to inform and help our clients. What should we know about these plans to be better able to do that?
A so-called “solo(k)” is like every other 401(k) in virtually all respects. Where it may differ from group 401(k) plans is in the simplicity of its plan document, and in plan administration. Because a solo 401(k) plan is intended to cover only individuals, and perhaps their spouses, who own and operate a business, it need not have complicated allocation formulas, or different eligibility or vesting conditions for different types of contributions. There’s no need for complicated nondiscrimination testing, nor is there immediate reporting to a government agency. As a result, fees associated with solo 401(k) plan sponsorship are generally significantly less than other 401(k) plans.
Some small businesses that we serve adopt a SIMPLE IRA plan as a “starter” plan. Why might an employer consider a solo 401(k) plan instead?
If the options offered by a SIMPLE IRA plan meet a client’s retirement saving objectives, then a SIMPLE IRA plan is a good choice. A primary reason for adopting a solo 401(k) plan is the higher contribution limits that apply to all 401(k) plans, whether they cover one person, or 100.
For example, the 2026 solo 401(k) salary deferral limit for someone under age 50 is $24,500, versus $18,100 for a SIMPLE IRA plan. For those who are age 50 or over and are eligible to make “catch-up” salary deferral contributions, the disparity is even more in favor of a solo 401(k) plan.
NOTE: For 2026, the standard SIMPLE IRA salary deferral limit is $17,000, but employees of eligible employers have an increased limit, and may defer up to $18,100.
Perhaps more important, an employer contribution of up to 25 percent of the owner-employee’s compensation can be made as a nonelective (profit sharing) contribution in a solo 401(k) plan. But in a SIMPLE IRA plan, employer contributions are limited to a 3 percent matching contribution (4 percent for eligible employers with 26–100 employees that allow increased deferral limits), plus a 10 percent nonelective employer contribution, the latter not to exceed $5,300 for 2026.
The overall 2026 maximum participant contribution of $72,000 for a person under age 50 in any plan—called the “annual additions” limit—can be reached with a solo 401(k) plan. It cannot be reached with a SIMPLE IRA plan.
What about a simplified employee pension, or SEP plan? These plans have no real administrative expenses, and—with no employees—the owner can make a 25 percent employer SEP contribution without worrying about a comparable obligation for anyone else. Right?
True. But compensation must be significantly higher to make the maximum $72,000 2026 contribution to a SEP plan. It would require $288,000 of compensation (if W-2 income) to make a $72,000 contribution ($288,000 x 25 percent). But a business owner with a solo 401(k) plan could reach $72,000 with income of only $190,000, because the employer contribution of $47,500 (25 percent of $190,000) can be supplemented with salary deferrals of $24,500, if under age 50. If age 50 or older, the ability to make catch-up salary deferrals would allow the owner to reach the maximum annual contribution with even less compensation.
We understand that with enactment of SECURE 2.0, SIMPLE IRA plans can now offer Roth contributions, something that was formerly an advantage of 401(k) plans. Has that 401(k) advantage now become irrelevant?
It’s true that one can now make Roth contributions in a SIMPLE IRA plan. But the previously mentioned higher salary deferral and employer nonelective contribution limits of a 401(k) apply similarly to Roth contributions in both plans, so the maximum contribution advantage remains with the solo 401(k) plan.
Furthermore, 401(k) contributions that begin as pretax can be converted to Roth at any time, and this applies to any pretax amounts rolled into the 401(k) from an IRA or another plan. For a SIMPLE IRA, two years must elapse before converting pretax SIMPLE assets to Roth, and before a SIMPLE IRA can accept rollovers of non-SIMPLE IRA assets.
Are there any other contribution advantages with a solo 401(k) plan?
Yes. In addition to making salary deferrals, and receiving deductible employer contributions, a 401(k) plan participant can make “nondeductible” employee contributions—which are neither pretax nor Roth amounts—as a way to reach that maximum $72,000 annual additions limit, a limit that is further increased for those age 50 or older. These nondeductible employee contributions can generate tax-deferred earnings, or be immediately converted to Roth amounts without tax consequences. They can even be available for immediate distribution from the plan without meeting any distributable-event conditions that might apply to other amounts, such as salary deferrals.
Are there other features that a solo 401(k) plan has that administratively simpler plans—such as SIMPLE IRA plans and SEP plans—do not?
Plan loans are available in 401(k) plans, but not in a SIMPLE IRA or SEP plan. This allows a participant—including the owner of the business that sponsors the plan—to take a repayable loan of up to 50 percent of his vested account balance, or $50,000, whichever is less.
Do solo 401(k) plans have more protection in bankruptcy situations?
Assets accumulated in either a 401k), SIMPLE IRA, or SEP plan are fully protected and do not have to be included in a bankruptcy estate, so there is no solo 401(k) advantage here. These protections would be carried over to an IRA if such accumulated assets are rolled over, whereas amounts that begin as IRA contributions, and their earnings, have a bankruptcy estate exclusion of $1,711,975, as indexed for 2026.
It’s a given that those who start a business hope to be successful. With success may come the hiring of employees. What happens to a solo 401(k) plan if this occurs?
The good news is that the plan does not “blow up,” or otherwise become void, or noncompliant. The bad news is that administrative costs will likely rise with a different service model. Government reporting—Form 5500, Annual Return/Report of Employee Benefit Plan—will begin as soon as the business has one or more employees other than an owner and spouse; or partners and spouses. Depending on plan design, nondiscrimination testing may be required. Recordkeeping will be more complex.
In anticipation of possible future hires—even if unlikely—it’s wise to set minimum eligibility conditions so that a new employee does not become eligible to participate immediately; unless immediate eligibility would be the owner’s wish. Business owners should be careful here, because if the business is “brand new,” restrictive eligibility conditions could exclude the owner, too.
The same is potentially true for vesting of employer contributions: some plan designs require immediate vesting, while others impose vesting schedules that require a new hire to remain employed in order to receive the full benefit.
Can an owner of multiple businesses set up a solo 401(k) plan for one business that has no common-law employees, and exclude the other business(es)?
If there is a sufficient degree of ownership in multiple businesses, these entities could together comprise what we call a “controlled group” of businesses. If so, any plan that one entity establishes would have to consider employees of the other(s) for possible eligibility. Exclusion of another jointly-owned entity’s employees may be possible, but would likely require passing certain benefits tests, which can be difficult, or perhaps impossible.
