The IRS-approved retirement plan, like Solo 401(k), is for small business owners and self-employed people, such as freelancers, independent contractors, etc. The condition is that they should not have any full-time employees. Spouses can be an exception. The plan has garnered enough attention, especially for its attractive contribution limit of USD$66,000 for people under 50 and USD$ 73,500 for anyone aged 50 or more. It lets you borrow money from your account tax-free with a maximum limit of up to USD$50,000. Plus, the opportunity to invest in alternative asset classes is additionally tempting. It can motivate some business owners to know whether opening different Solo 401(k) accounts is possible.
After checking the limits for 2023, you may also be curious about this. Before probing into the matter, let’s clarify that it depends. Under the Revenue Act of 1964, the IRC introduced Controlled Groups Provisions to consider if the businesses share any of the relationships as a parent-subsidiary, brother-sister, combination of two, or affiliated service.
Parent-subsidiary controlled group
It applies when the chains of corporations share a common bond through stock ownership with a parent corporation. At least one or two of those corporations should possess 80% stocks of each business, while the parent company can have 80% stock of one of those corporations in the group apart from its own. Suppose Tim owns Corporation A, while Corporation A controls 90% of Corporation B. In that scenario, controlled group terms and conditions can apply. Specifically, the IRS will look at corporations A and B as one entity for the 401(k) plan. Due to this, employees can establish their 401(k) program under any of them.
Brother-sister controlled group
A group like this can contain two or more companies with at least five joint owners, who can be a person, an estate, or a trust. They will have effective control and controlling interest in each group. Holding interest indicates that the common owner owns at least 80% of the corporation’s stock.
Affiliated service
It’s a complicated and broad term involving a group of companies connected to each other. Under IRC Section 414(m), the control concept expanded to include affiliated entities. As per the rule, any affiliated service group member employee will have a single employer.
So, what does all this mean? Whether your group of companies has a relationship of brother-sister, parent-subsidiary, or affiliation, all of them will be eligible for 401(k) as one. All the employees can access plan benefits. However, despite two or more accounts, one may not get additional help. Generally, business owners are interested in two plans to save more for their retirement through the 401(k). Unfortunately, employee deferrals consider contributions by individuals and not by accounts. Suppose you open two or more accounts. You cannot pay an additional amount if you exhaust your contributions as an individual. However, profit sharing contribution as an employer can have a scope. Again, the process can be complex, and it can be challenging to meet all the requirements. Nevertheless, talk to your plan provider or financial planner to understand more.
