Solo 401(k) for Spouses with Individual Companies?

[Susan S.]

A husband and wife each operate their own consulting business. There are no other employees in either company. The husband has maintained a solo 401(k) for some time and the wife would now like to join. Do controlled group rules enable her to participate in the solo plan or would she need to be an employee of the husband's business?

[Madison71]

No - she would have to be an employee of husband’s company to contribute to husband’s plan. There is also an exception to treating as part of a controlled group if spouses own two unrelated companies where neither one has any involvement in the other.  

[BG5150]

Do they have any minor (under 21) children?  If so, you have a controlled group.

Do they live in a community property state?

I think she can be an adopting employer of the plan, and thus, it becomes a multiple employer plan.

[Madison71]

Great point on children

[ETA Consulting LLC]

There are several standards to apply when determining whether a whether a controlled group relationship exists between companies owned by two people who are married.  A spouse being part of the other one's business is merely one standard.  Another standard would be If more than 50% of Gross Income on one business is passive. 

With that said, the key is to actually determine if the two companies are part of a controlled group in any way.  At the end if the day, they can still adopt on to the same plan.  The difference would be whether they are treated as a single employer or multiple employer plan.

Good Luck!

[Susan S.]

Thank you all for the input.  There are no minor children.  I didn't realize a solo could also be a MEP, so I will look into that as an option. 

[BG5150]

Community property state?  That wasn't answered.

There is no such thing as a "solo 401(k)."  That is merely a marketing term.  It is simply a regular ol' 401(k) plan that happens to cover only one person.  If this guy ever has an employee that qualifies for the plan, then it still is a regular ol' 401(k) plan, but it now covers more than just the owner, and there are additional reporting requirements under ERISA.

A question I have, can a MEP file an EZ if the only people are covered are the owners of the respective companies?

[ETA Consulting LLC]

1 hour ago, BG5150 said:

A question I have, can a MEP file an EZ if the only people are covered are the owners of the respective companies?

I would say "no".  Even though (in this situation) the plan will be deemed to pass all non-discrimination requirements under the Internal Revenue Code, it still doesn't seem to meet the exception from being treated as an ERISA plan.  To me, it would be similar to hiring a child and putting them on the payroll; still a solo(k) plan for nondiscrimination purposes, but fails to meet the exceptions for preparing a full report.

Good Luck!

[Luke Bailey]

It's not a MEP if they form a controlled group, which I'm not sure was ever determined either way. However, even if in a controlled group, she would need to adopt, which is just a line in the adoption agreement and a signature.