401k part owner not participating in plan

[tertue]

A C Corp is owned equally by 3 people. 1 of the owners works for the C Corp as a W2 employee and is the only employee. Can just the W2 employed owner participate in a 401k plan or must all owners participate?

Also, do all owners have to participate in the profit sharing or can the W2 employed owner be the only owner receiving profit sharing either through a 401k or as a corporation election? Would a regular 401K or a Solo 401k be the best fit in this situation?

[ETA Consulting LLC]

You can have a plan written to cover only the one owner and it would pass every test since there aren't any NHCEs. You can actually have a separate plan for each owner; again, as long as there aren't any other NHCEs. The key is to design the plan with the correct language and ensure that you immediately change the design when you employ and NHCE and they meet the age/service requirements for plan entry.

So, you can do it. You should structure it correctly.

Good Luck!

[K2retire]

Are the other two owners working for the business or are they investors? If they are investors with no W-2 income nor K-1 earned income they can't participate in the plan.

[tertue]

Are the other two owners working for the business or are they investors? If they are investors with no W-2 income nor K-1 earned income they can't participate in the plan.

The other 2 owners DO NOT work for the business, they are only investors. But if the W2 employed owner receives a profit sharing into his 401k plan, are the other 2 investors required to also receive some kind of profit sharing outside of a 401k plan since they don't participate in the 401k plan?

[BG5150]

^^ Nope

[Bird]

There's "profit sharing plan contributions" which is a misnomer anyway, since profits aren't required to make them; let's call them "discretionary employer contributions." As noted, the non-employee owners can't get anything because they don't have compensation.

And there's "profit sharing" - an agreement between owners as to how profits are to be shared. Whether the investor-only owners should get something because the employee-owner gets a discretionary employer contribution is really something to be answered by their ownership agreement - and it might not be in there so it might need discussion or interpretation. But it's not a plan issue.

[tertue]

There's "profit sharing plan contributions" which is a misnomer anyway, since profits aren't required to make them; let's call them "discretionary employer contributions." As noted, the non-employee owners can't get anything because they don't have compensation.

And there's "profit sharing" - an agreement between owners as to how profits are to be shared. Whether the investor-only owners should get something because the employee-owner gets a discretionary employer contribution is really something to be answered by their ownership agreement - and it might not be in there so it might need discussion or interpretation. But it's not a plan issue.

Would a Solo 401k aka Individual 401k be appropriate in this case? Not planning to hire anyone else in the future.

But if anyone else is hired, could it be worked so that any part-time employees are not eligible to be part of the 401k?

[ETA Consulting LLC]

There's "profit sharing plan contributions" which is a misnomer anyway, since profits aren't required to make them; let's call them "discretionary employer contributions." As noted, the non-employee owners can't get anything because they don't have compensation.

"Like". I, typically, use the term non-elective, or discretionary non-elective. But, you're absolutely right that the term profit sharing is a huge source of confusion of the those outside the industry; not that the term non-elective would make it better