Solo 401(k) Plans

First allowed in 2002, Solo 401(k) plans (also called Individual(k) plans) emerged as a powerful tool for small business owners to shelter a significantly greater portion of income for retirement than was previously available through profit-sharing plans, SEPs, or SIMPLE plans.

A Solo 401(k) is a type of 401(k) designed for owner-only businesses — specifically businesses whose only eligible participants are the owner(s) and their immediate family members (spouse, children). The plan may also cover businesses whose non-owner employees can be excluded under federal law (part-time workers under 1,000 hours, employees under age 21, union employees, nonresident aliens).

Because the Solo 401(k) is designed for owner-only coverage, it is:

• Less complex and less burdensome to administer than conventional 401(k) plans
• Still eligible for all standard 401(k) features, including loan provisions and hardship distributions
• Subject to all the same general 401(k) rules and ERISA requirements

The Solo 401(k) contribution structure combines two components: an employee salary deferral (elective contribution) and an employer profit-sharing contribution — both made by the owner in their dual role as employee and employer.

• Maximum total annual additions: lesser of 100% of compensation or $70,000
• Employer deduction limit: 25% of eligible payroll
• Annual elective deferral limit: $24,500
• Catch-up contribution (age 50+): $8,000 additional (total $32,500)
• Super catch-up (age 60–63, SECURE Act 2.0): $11,250 additional (total $35,750)
• Compensation cap: $360,000

For owners of incorporated businesses, compensation is the W-2 wages paid by the corporation. Owners of S corporations must base contributions on W-2 income — not on pass-through profits.

For sole proprietors and partners, compensation means net earnings from self-employment — gross business income minus allowable business deductions, including one-half of the self-employment tax and the plan contribution itself.

Because the plan contribution is deducted before calculating the contribution percentage, a nominal rate of 25% on post-contribution income equates to approximately 20% of pre-contribution income. The conversion formula is:

For example: 25% ÷ (1 + 25%) = 25% ÷ 1.25 = 20%. This is why the maximum profit-sharing contribution for sole proprietors and partners is calculated at 20% of modified net profit (not 25%).

For incorporated business owners, contributions are based on W-2 wages (capped at $360,000 in 2026). The calculation follows three steps:

1. 1
   Determine Maximum Profit-Sharing Contribution
   = 25% × Total W-2 Wages (capped at $360,000)
2. 2
   Determine Maximum Salary Deferral
   = Lesser of the elective deferral limit ($24,500 in 2026) or Total W-2 Wages
3. 3
   Calculate Maximum Solo 401(k) Contribution
   = Profit-Sharing Contribution + Salary Deferral
   Cannot exceed $70,000 (or $78,500 with age 50+ catch-up; $79,250 with age 60–63 super catch-up) or 100% of wages

For sole proprietors, contributions are based on net business profits from Schedule C, adjusted for self-employment taxes. The calculation follows four steps:

1. 1
   Determine Modified Net Profit
   = Net Profits − ½ Self-Employment Tax
   (Capped at $360,000)
2. 2
   Determine Maximum Salary Deferral
   = Lesser of $24,500 (2026) or Modified Net Profit
   Plus catch-up for age 50+ ($8,000) or age 60–63 super catch-up ($11,250)
3. 3
   Determine Maximum Profit-Sharing Contribution
   = Modified Net Profit × 20%
   (20% of pre-contribution income = 25% of post-contribution income)
4. 4
   Calculate Maximum Solo 401(k) Contribution
   = Salary Deferral + Profit-Sharing Contribution
   Cannot exceed 100% of Adjusted Net Business Income (Net Profits − ½ SE Tax − profit-sharing contribution)

Partners calculate contributions based on their share of partnership profits from Schedule K-1, adjusted for self-employment taxes. The same four-step method applies as for sole proprietors.

If the business hires non-family employees in the future, the Solo 401(k) must be converted to a regular 401(k) when those employees become eligible to participate — subjecting the plan to nondiscrimination rules and other administrative requirements. Plan documents should address this possibility. Under federal law, the following employees may be excluded from 401(k) plan coverage:

• Employees under age 21
• Employees with less than one year of service
• Employees who work fewer than 1,000 hours per year
• Union employees covered by collective bargaining agreements
• Certain nonresident alien employees

Contributions are allowed only after plan documents have been adopted — no retroactive contributions are permitted. A written salary deferral election must be filed before the deferred wages would otherwise have been paid. For unincorporated businesses, the IRS considers business profits received on the last day of the tax year; salary deferral elections must be filed before that date.

As with all qualified plans, Solo 401(k) plan documents must be filed no later than the end of the business’s tax year.

Since 2002, owner-participants may borrow from their Solo 401(k) accounts — this was previously a prohibited transaction. The same loan rules apply as for any 401(k):

• Maximum: lesser of $50,000 or 50% of the vested account balance
• Loan must be secured by collateral
• Repayment must be at least quarterly
• Repayment within 5 years (no limit for primary residence loans)
• Loan must carry a reasonable rate of interest