Set Up as an S-Corporation and Owned by Partners? Here’s How a Self-Directed Solo 401K Works for You

If you have a business that is organized as an S-corporation (S-corp) and owned by one or more partner(s), or shareholders, you can set up a Self-Directed Solo 401(k) plan for your business, assuming all other eligibility requirements are met.

First, let’s confirm that an S-corp can sponsor this kind of plan. By definition, a Self-Directed Solo 401(k) plan is a 401(k) for owner-only businesses with no full-time w-2 employees working more than 1,000 hours per year, (other than the owner(s) or his/her spouse). Per the IRS website for one participant plans, the IRS provides an example scenario involving a Solo 401(k) sponsored by an S-corp in order to explain the salary deferral and profit-sharing contribution limits. Therefore, it can be deduced that the IRS acknowledges that an S-corp can sponsor a Solo 401(k) plan.

Second, let’s look at how it works when more than one person owns the company. For an S-corp with multiple partners/owners, each partner must own more than 2% of the outstanding stock of the S-corp, (see IRC Section 1372). Therefore, an S-corp can open a Solo 401(k) plan as long as each of the partners own more than 2% of the outstanding shares of the S-corp and they do not employee full-time w-2 employees.

The company would sponsor one plan and each partner would have his/her own account, (or accounts, if they contribute in more than one of the following ways: pretax, Roth, after-tax,) that will roll up under the plan.

Each partner can contribute to his/her own account(s) through elective salary deferral and profit-sharing. Since they are an S-corp and pay themselves a salary, the contribution calculations are based on their salary. The contribution limit is stated as: up to 100% of salary from self-employment, not to exceed the following limits for 2020: $19,500 for salary deferral and 25% of his/her salary for profit sharing. The combined annual limit for both is $57,000, for those under 50 years of age. For those who are 50 or older, there is a salary-deferral catch-up contribution of $6,500 that can also be included, bringing the limit to $63,500. (The profit of the company has no bearing on the calculation.)