Owners Getting Paid via 1099 & Participating in Plan

We have a potential client where they have a company 401(k) Plan, but the two owners technically aren't on payroll.  Instead they are paid via 1099.

Can they setup their own individual 401(k) instead of participating in the company plan?  Is there any testing issues if they opted to go that route?

Thanks in advance!

What is your role/concern?

Are you starting with skepticism that their income reporting is incorrect? What if it is incorrect?

I think clarification is needed on this. If the owners of the company are sponsoring a 401k plan, it's either an incorporated business for which they are not being paid wages, therefore cannot defer, or it's unincorporated in which their income should pass through to their Schedule C or K-1 as self employment income.  Typically the business would pay independent contractors via 1099, but it doesn't seem right that the owners of the business would qualify as independent contractors.  It seems to me they are already eligible for the plan they sponsor unless specifically excluded.  The only potential qualification issue is if they sponsor a Safe Harbor Non Elective 401k plan and were entitled to Safe Harbor Contributions based on their SE income and did not make that contribution.

Agree with @David D - including the 1099 situation not appearing correct unless something else going on. Are the owners each single member LLCs that own the company and company then pays the LLCs via 1099s. Even so, the LLCs would be either incorporated (C or S) or not (sole prop) and pay their owners via W2 or K1, respectively. Then (I think) the LLCs are disregarded entities and their earned income should count for 401k plan. If that's not the case then that whole 1099 situation is wrong IMHO - but I'm not an accountant.

On 1/16/2026 at 1:04 PM, CuseFan said:

Agree with @David D - including the 1099 situation not appearing correct unless something else going on. Are the owners each single member LLCs that own the company and company then pays the LLCs via 1099s. Even so, the LLCs would be either incorporated (C or S) or not (sole prop) and pay their owners via W2 or K1, respectively. Then (I think) the LLCs are disregarded entities and their earned income should count for 401k plan. If that's not the case then that whole 1099 situation is wrong IMHO - but I'm not an accountant.

 

I agree, the situation seems really odd to me but this is what I'm being told (and I have questioned the situation).  At the end of the day, if they do separate 401(k) Plans for themselves, as long as they aren't getting benefits that the employees under the main plan are getting, would there be an issue?

Ok lets be dumb and set aside the oddities but they have been covered enough I won't beat the dead horse too much. 

I would check if this is an Affiliated Service Group.  I have to admit I know enough about these to know to look as you see them infrequently.   I mean what are they doing for this company as "owners" if not managing it?   It might not be a service organization for example.  

My guess even if they think they can thread the needle on the Affiliated Service Group rules and so forth in an audit the way they are being paid becomes the issue.  This seems to be set up to exclude the rank and file from benefits they want for themselves.   

I just try to avoid the stink of pigs in this job and this has the stink of pigs trying to get benefits for themselves they aren't willing to give the rank and file.   

18 hours ago, ESOP Guy said:

Ok lets be dumb and set aside the oddities but they have been covered enough I won't beat the dead horse too much. 

I would check if this is an Affiliated Service Group.  I have to admit I know enough about these to know to look as you see them infrequently.   I mean what are they doing for this company as "owners" if not managing it?   It might not be a service organization for example.  

My guess even if they think they can thread the needle on the Affiliated Service Group rules and so forth in an audit the way they are being paid becomes the issue.  This seems to be set up to exclude the rank and file from benefits they want for themselves.   

I just try to avoid the stink of pigs in this job and this has the stink of pigs trying to get benefits for themselves they aren't willing to give the rank and file.   

I don't disagree and that's why I'm questioning it.  If they want to setup it up with te same benefits and willing to make the same opportunities available to the rank and file, then there shouldn't be an issue though?  It seems odd to me, but they are pretty clear they want to have a separate plan.  I've said they all have to have the same opportunities, which they seem OK with.

2 hours ago, metsfan026 said:

they want to have a separate plan

Reasoning? If they want so they can invest in whatever they want versus being limited to the same fund lineup, then you have a BRF discrimination issue. 

6 hours ago, metsfan026 said:

there shouldn't be an issue though?  It seems odd to me, but they are pretty clear they want to have a separate plan. 

One issue might be passing 410b coverage on it's own.  Often an advantage when adding a second plan of an employer is to have different testing methods or allocations, which you most likely would not be able to do with this plan. They would simply be paying for administration of two plans rather than one.

20 hours ago, CuseFan said:

Reasoning? If they want so they can invest in whatever they want versus being limited to the same fund lineup, then you have a BRF discrimination issue. 

I'll be honest, I'm not 100% sure what their reasoning is.  I told them they can't have investment options that no one else had, and they understood that.

Maybe they don't want THEIR asset levels showing up on a publicly disclosed 5500-SF.  So their plans are each an EZ so as to file less publicly, but everything gets tested together?

2 minutes ago, Bri said:

Maybe they don't want THEIR asset levels showing up on a publicly disclosed 5500-SF.  So their plans are each an EZ so as to file less publicly, but everything gets tested together?

That's definitely possible, but as long as the investment options are the same and they are tested together you agree there are no issues?  I just want to make sure I'm not overlooking anything (these questions are all the same points I had already brought up to them)

yeah, no argument there - If everything's identical then they could have a separate plan for every single employee, too.