Why eligibility can change
A Solo 401(k) is built for owner-only businesses with no qualifying non-owner employees, and the simplified administration that makes it practical depends on that status holding. Three developments can end it: your employee headcount grows past the plan's limits, your ownership of other businesses creates a controlled group issue, or the business shuts down or stops producing earned income.
What to review annually
Employee headcount
A qualifying employee is any non-owner worker age 21 or older who works more than 1,000 hours per year. Once any employee crosses that threshold, the business can no longer sponsor a Solo 401(k).
Long-term part-time employees are a separate consideration. Employees working at least 500 hours per year across two consecutive years must be offered plan eligibility, so track hours for any regularly recurring part-time worker. If someone is approaching that threshold, consult a benefits professional before the eligibility window opens rather than after.
Contractors receiving a 1099 do not count as employees for this purpose. Union employees and non-resident alien employees may also be excluded in certain circumstances.
Other businesses you own
Owning or controlling more than one business can create a controlled group or affiliated service group under IRS rules. Businesses under common ownership of 80 percent or more, or where the same five or fewer owners hold more than 50 percent effective control, are treated as a single employer for retirement plan purposes. If any business in that group has qualifying employees, the entire group loses Solo 401(k) eligibility.
Review your ownership interests in other businesses annually, keeping in mind that a family member's ownership may be attributed to you in certain circumstances. A change in your ownership picture is worth reviewing with a tax professional familiar with controlled group rules.
Ongoing nature of the business
The sponsoring business must remain an active, for-profit enterprise generating earned income. Passive income such as rent or K-1 distributions from passive investments does not qualify as earned income for Solo 401(k) purposes.
If your self-employment activity has wound down substantially or stopped producing income, evaluate whether the business still functions as an ongoing enterprise. A business generating no earned income cannot support the plan.
What to do if you no longer qualify
Termination is the required path once the business stops qualifying, and it does not put your retirement savings at risk. Plan assets roll to a Checkbook IRA or to another eligible retirement plan, preserving their tax-deferred status.
The termination itself follows a defined procedure, including a final Form 5500-EZ, which is required regardless of plan value at the time of termination. Abandoning an ineligible plan rather than closing it properly leaves the final filing obligation unmet and the plan's status unresolved.
Frequently Asked Questions
Can I keep the plan if I hire a part-time employee who stays under 1,000 hours?
Yes. Part-time employees working fewer than 1,000 hours per year do not disqualify the plan under the standard rule. Monitor hours carefully, and watch the long-term part-time rules that reach workers logging 500 or more hours across consecutive years.
What if I start a new business while already sponsoring a Solo 401(k)?
The new business may be includable in your plan as a participating employer, or it may create a controlled group issue, depending on its employee structure. Review the situation with a tax professional before assuming the new business is compatible with the existing plan.
Does retiring or winding down my business require me to terminate the plan?
Yes. A Solo 401(k) must have an active sponsoring business behind it. Retiring or closing the business means terminating the plan and rolling the assets to an appropriate successor plan, or distributing them.