Can an S Corporation Have a Solo 401k?

An S corporation can establish a Solo 401(k) retirement plan if specific conditions are satisfied. This plan is designed for business owners who are self-employed or have no employees, offering a way to make substantial retirement contributions. For an S corp owner, this structure allows them to act as both the “employee” and the “employer” for contribution purposes.

S Corporation Eligibility for a Solo 401(k)

The primary qualification for an S corporation to establish a Solo 401(k) is its employee count. This retirement plan is available to businesses with no full-time W-2 employees other than the owner and their spouse. If the owner’s spouse earns compensation from the business, they can also participate in the plan.

A Solo 401(k) is not available if the business has employees who are eligible to participate in a company retirement plan. This means the business cannot have full-time employees, defined as those working 1,000 hours or more in a year. If a part-time employee works between 500 and 999 hours for three consecutive years, they may become eligible to participate, which would disqualify the business from a Solo 401(k). Independent contractors paid via Form 1099 are not considered employees and do not affect the S corp’s eligibility.

If the S corp owner also has ownership in other businesses, “controlled group” rules may apply. Under these rules, businesses with common ownership are viewed as a single entity for retirement plan purposes. If any business within this controlled group has full-time employees, it could disqualify the S corp from sponsoring a Solo 401(k).

Contribution Rules for S Corp Owners

For an S corporation owner, contributions to a Solo 401(k) are based exclusively on the W-2 salary they receive from the corporation. Shareholder distributions, which are profits passed to the owner on a Schedule K-1, are not considered earned income for retirement contribution purposes and cannot be used as the basis for them.

The owner of the S corp contributes as both an “employee” and “employer.” As an employee, the owner can make elective deferrals, limited to $23,500 for 2025.

Individuals aged 50 and over are permitted to make additional “catch-up” contributions. For 2025, this extra amount is $7,500. A special, higher catch-up amount of $11,250 is available for those aged 60 to 63. These employee contributions, including any catch-up amounts, can be made to either a traditional pre-tax 401(k) or a Roth 401(k), if the plan document allows.

The S corporation, as the employer, can also make a profit-sharing contribution. The employer contribution is limited to 25% of the owner’s W-2 compensation. For example, on a W-2 salary of $100,000, the corporation can contribute up to $25,000.

The total combined contributions from both the employee and employer cannot exceed an overall annual limit set by the IRS. For 2025, this combined limit is $70,000, not including any catch-up contributions. For those age 50 or over, the total limit increases by the amount of their catch-up contribution. For example, an S corp owner under age 50 who earns a W-2 salary of $150,000 could make the maximum employee contribution of $23,500, and the S corp could then make an employer contribution of $37,500 (25% of salary), for a total of $61,000.

Establishing and Maintaining the Plan

To set up a Solo 401(k), the S corporation owner must first choose a financial institution to act as the plan provider and custodian. The business will need an Employer Identification Number (EIN) from the IRS to open the plan. The owner will complete a plan adoption agreement, which is the legal document that formally establishes the plan and outlines its specific features, such as the availability of loans or Roth contributions.

The owner’s employee contributions (elective deferrals) must be made by the end of the calendar year, December 31. An S corporation can set up a new Solo 401(k) for a given tax year up until its tax filing deadline, including extensions, for that year. This allows the business to make its employer profit-sharing contribution for the prior year, even if the plan is opened in the new year before taxes are filed.

Ongoing administration requires filing Form 5500-EZ, Annual Return of One-Participant Retirement Plan. This informational return is only required once the total assets of the plan reach or exceed $250,000 at the end of the plan year. If the S corp owner maintains multiple one-participant plans, the assets of all such plans must be aggregated to determine if the $250,000 filing threshold has been met. A final Form 5500-EZ must be filed when the plan is terminated, regardless of the total asset value. The filing deadline for Form 5500-EZ is July 31 of the year following the plan year for which the form is required.