Workers who do not count
Several categories of workers are excluded from the employee count for Solo 401(k) purposes:
- Independent contractors receiving a 1099 are not employees. If your business pays workers on a contract basis rather than issuing W-2 wages, those workers do not affect your eligibility, provided the contractor classification is legitimate and consistent with IRS guidelines.
- Employees under age 21 do not count. Workers younger than 21 may be excluded from plan participation and do not disqualify the Solo 401(k).
- Union employees covered by a collective bargaining agreement are excluded from the non-discrimination rules that govern plan eligibility and do not count toward disqualification.
- Your spouse is a special case. A spouse working in the business does not disqualify the plan, in fact, a compensated spouse is eligible to participate as a plan member.
The 1,000-hour rule
A non-owner employee must work more than 1,000 hours per year, roughly 20 hours per week for a full year, to be considered a qualifying employee for plan eligibility purposes. Workers who fall below this threshold in a given year do not count and do not disqualify the Solo 401(k).
Long-term part-time employees
The SECURE 2.0 Act of 2022 introduced an important update to the rules on part-time workers. Employees who work at least 500 hours per year for two consecutive years are now entitled to participate in an employer retirement plan. This means a part-time employee who consistently works 10 or more hours per week can eventually trigger the same disqualification as a full-time employee.
Seasonal workers are a particular risk factor here. An employee who returns for two or more seasons and logs 500+ hours each time crosses this threshold regardless of their off-season status. If your business relies on recurring seasonal help, the long-term part-time rules deserve close attention.
If any of your part-time workers are approaching or have crossed the two-year threshold at 500+ hours per year, your Solo 401(k) eligibility should be reviewed with a qualified tax professional.
Frequently Asked Questions
My child works in my business. Do they count as an employee?
Not if they are under age 21. Children employed in the business are excluded from plan participation eligibility until they reach age 21, so they do not affect your Solo 401(k) qualification. Once they turn 21 and continue working, the standard hour-based rules apply and their status should be reassessed.
What if I've been treating a worker as a 1099 contractor but they should have been a W-2 employee?
Misclassification is a meaningful risk. If the IRS determines that a worker classified as an independent contractor was actually an employee, based on the degree of control, integration into the business, and other factors, that worker may be retroactively treated as a qualifying employee. This could affect your plan's eligibility for prior years. If contractor classification in your business is uncertain, consult a tax professional before establishing a Solo 401(k).
What happens if a part-time employee hits the long-term part-time threshold after my plan is already established?
Your plan would no longer qualify as a Solo 401(k) once a non-owner employee becomes eligible for benefits. At that point, you would need to either offer the employee plan participation, converting to a full employer 401(k), or terminate the Solo 401(k) plan. This is why monitoring part-time employee hours annually is important ongoing plan administration.