A CPA I work with met with me to run through four potential candidates he has for the Solo 401k. One of the clients is in the below situation and I wanted to run it by you to understand if the Solo 401k would be an option. I think it would be and am hoping it is.
The potential client owns an orthodontics practice and has no direct employees. It is a single-member S-Corp. He essentially pays a company 10% of revenues to staff his practice, manage billing, insurance, etc. All of the employees in his office are employed by the large company that he pays 10% to. They have access to the large companies 401k plan, but the potential client is not allowed to participate as he is not an employee of the large company and has no ownership in that company. For his single member S-corp he is the only employee and takes a salary of $60,000 per year.
Do you think a Solo 401k would be allowed in this situation? As none of the employees work for his S-Corp and they also have access to the large companies 401k whereas the potential client does not, I would think control group rules would either force the larger company to provide him access to the 401k, but given the fact that they do not I believe the control group rules would certainly allow him to have a Solo 401k.
ANSWERS:
I agree that the person described below is eligible to setup a Solo 401k if the employees described below are not leased employees (and he has no other business with employees). Please see more information below.
QUESTION: How do I know if I have any leased employees?
Answer: If all three of the following criteria are met then the individual/employee in question will be considered a leased employee.
1. First, the individual must be hired pursuant to an agreement between the company sponsoring the 401(k) plan and the leasing organization.
2. Second, the individual must perform services under the primary direction and control of the company sponsoring the 401(k) plan.
3. Third, the individual must work on a substantially full-time basis for at least one year. (There are different interpretations of what "a substantially full-time basis" means, but one easy rule of thumb is to count individuals who work 1,000 or more hours in a year).