Controlled Group Rule

If you want to open a Solo 401k you must be certain that you are not violating the controlled group rule.

A Solo 401k is a retirement plan for self-employed individuals or small business owners with no full-time employees other than themselves or their spouses. However, not everyone who is self-employed or owns a small business can open a Solo 401k. There are some rules that may restrict them from doing so.

Controlled Group Rule

One of these rules is the controlled group rule. A controlled group of employers is treated as one employer for Solo 401k eligibility purposes. The plan is eligible for all employees under that group. If eligible to participate, all employees (including the owner) must receive plan contributions.  Therefore, you cannot use a Solo 401k even if a single company under the controlled group has employees.

There are two types of controlled groups: parent-subsidiary and brother-sister. A parent-subsidiary controlled group exists when one company owns at least 80% of another company. A brother-sister controlled group exists when the same five or fewer people own at least 80% of two or more companies.  There are also attribution rules that apply to brother-sister controlled groups.

Attribution Rules

There are several attribution rules within the controlled group rule.  The rules consider a spouse to be an owner unless three exceptions apply.  Your spouse must have no direct ownership, have no participation in the business, and the business cannot have greater than 50% passive income.

The rules attribute ownership between parents and minor children to each other’s businesses under all circumstances.  Adult children and parents, and grandchildren and grandparents are also attributed ownership unless they own less than 50% of the business in question.

What To Do If You Are Part of a Controlled Group

If you are part of a controlled group, you may not be able to open a Solo 401k unless you meet certain exceptions or exclusions. For example, there are special transition rules that apply in case of mergers and acquisitions. There are also some employees who can be excluded from plan participation based on age or years of service.

To determine if you are part of a controlled group and how it affects your Solo 401k eligibility, you should consult with an experienced professional.

You should now understand the basics of controlled group rules regarding a Solo 401k.

Sherman Asset Management does not provide tax or legal advice.  The information contained herein is provided for informational purposes only.  Do not rely solely upon this information to make tax decisions.