Solo 401k Rules for a Single Member LLC

A Solo 401(k) is a retirement plan designed for self-employed individuals and business owners with no employees. A Single-Member Limited Liability Company (SMLLC) is a business structure owned by one person that provides liability protection while being taxed as a sole proprietorship by default. Because an SMLLC generates self-employment income for its owner, it aligns with the requirements for a Solo 401(k), offering high contribution limits and flexible investment options. This arrangement allows the owner to contribute as both the “employee” and the “employer” of their business, often exceeding the limits of traditional IRAs.

Eligibility Requirements for a Solo 401k

To qualify for a Solo 401(k), a Single-Member LLC owner must meet two criteria. The first is the presence of self-employment activity that generates earned income. The net income of the business is considered self-employment income to the owner, and this figure forms the basis for calculating annual plan contributions.

The second requirement is the absence of eligible non-owner employees. The plan is intended for owner-only businesses, though a spouse who earns income from the business can also be covered. An employee working over 1,000 hours in a year would make the business ineligible. Rules effective in 2025 also disqualify a business if it has a long-term, part-time employee, defined as someone who works over 500 hours per year for two consecutive years.

If the SMLLC grows and hires an employee who meets these criteria, it will lose its eligibility for the Solo 401(k). The business would then need to terminate the plan and transition to a different type of retirement plan, such as a traditional 401(k) or a SEP IRA.

Plan Establishment and Key Decisions

A Solo 401(k) plan must be formally established, beginning with obtaining an Employer Identification Number (EIN) for the SMLLC from the IRS. The plan must be opened under this business EIN, not the owner’s personal Social Security Number, as the LLC is the plan sponsor.

Next, you must select a financial custodian, such as a brokerage firm, to hold the plan’s assets. This institution will provide the necessary legal documents, primarily the Plan Adoption Agreement and the Trust Agreement. The adoption agreement is where the business owner formalizes the plan’s existence and outlines its specific rules, while the trust agreement establishes the legal framework for holding and managing the plan’s investments for the benefit of the participant.

Completing the adoption agreement involves making one-time decisions that dictate how the plan will operate. The owner must decide whether to allow for Roth contributions, which are made with post-tax dollars but allow for tax-free withdrawals in retirement. Another election is whether to include a loan provision, which would permit the owner to borrow up to $50,000 or 50% of the account balance, whichever is less.

Thanks to the SECURE 2.0 Act, the deadline for establishing a new Solo 401(k) for an SMLLC taxed as a sole proprietorship is the owner’s personal tax filing deadline for that year, not including extensions. This flexibility allows for retroactive employee and employer contributions to be made for the prior year, giving owners more time to assess their income.

Contribution Rules and Calculations

The owner of an SMLLC contributes to a Solo 401(k) in two capacities: as the “employee” and as the “employer.” The employee contribution, called an elective deferral, allows the owner to contribute up to 100% of their compensation up to the annual limit. For 2025, this limit is $23,500.

For individuals age 50 and over, an additional catch-up contribution is permitted. The 2025 standard catch-up amount is $7,500, with a higher catch-up of $11,250 available for those aged 60 to 63. The employer contribution is a profit-sharing contribution calculated as a percentage of compensation. The total combined contributions cannot exceed the overall IRS limit of $70,000 for 2025, plus any applicable catch-up amount.

SMLLC Taxed as a Disregarded Entity

When an SMLLC is a disregarded entity, its income is reported on Schedule C of the owner’s Form 1040. Contributions are based on the net adjusted business profit. The calculation starts with the net profit from Schedule C, which is then reduced by one-half of the self-employment taxes paid.

This adjusted figure is the compensation base used for calculating the employer contribution, which is 20% of this base. The employee contribution is based on the same compensation figure, allowing the owner to contribute up to 100% of this compensation up to the annual deferral limit.

SMLLC Taxed as an S Corporation

If the SMLLC has elected to be taxed as an S Corporation, the calculation method changes. The owner-employee receives a W-2 salary from the business, and this salary becomes the basis for both employee and employer contributions. This differs from a disregarded entity, where contributions are based on the entire net profit.

The employee contribution is a direct deferral from the W-2 salary, up to the annual IRS limit. The employer contribution is then calculated as up to 25% of that same W-2 salary. Because contributions are based only on W-2 wages, the owner’s salary must be set at a reasonable level, which requires careful planning to balance salary payments with profit distributions.

Ongoing Plan Administration

Maintaining a Solo 401(k) involves ongoing administrative responsibilities to maintain its qualified status. The primary requirement is filing Form 5500-EZ, Annual Return of One-Participant Retirement Plan, once the total assets in the plan reach or exceed $250,000 at the end of the plan year. The form reports financial information to the IRS and is due by the end of the seventh month after the plan year ends.

Plan owners can also consolidate other retirement funds into their Solo 401(k) through a rollover. This allows funds from a former employer’s 401(k) or from a traditional IRA to be moved into the Solo 401(k) account. This can simplify an individual’s financial life by bringing retirement assets under a single plan with access to features like the plan loan.

Should the business close or the owner decide to end the plan, a formal termination process must be followed. This involves ceasing all contributions and formally dissolving the plan according to the terms in the plan documents. A final Form 5500-EZ must be filed for the last year of the plan, regardless of the total asset value, and all assets must then be rolled over into another qualified retirement account, such as an IRA, to avoid immediate taxation and penalties.