What Happens to My Solo 401(k) If I Hire an Employee?

You started your business by yourself.

You opened a Solo 401(k).

Everything worked great.

And now…

You’re hiring your first employee.

So what happens to your Solo 401(k)?

• Do you have to close it?
• Can your employee participate?
• Do you suddenly need a completely different retirement plan?

The short answer?

Hiring an employee doesn’t automatically mean your Solo 401(k) disappears.

But it does mean you need to pay attention.

Why Does Hiring an Employee Matter?

A Solo 401(k) is designed for a business with no employees other than the owner and, in some cases, the owner’s spouse.

That’s what makes it “solo.”

Once you hire employees, you have another question to answer:

Will any of those employees become eligible for your retirement plan?

That’s where things can change.

Does My New Employee Immediately Join My Solo 401(k)?

Not necessarily.

Every retirement plan has eligibility requirements.

Your new employee may not immediately meet those requirements.

But that doesn’t mean you can ignore the issue until later.

As your business grows, it’s important to understand when employees could become eligible and what that means for your retirement plan.

Can I Just Exclude My Employees?

This is where you need to be careful.

You generally can’t simply decide:

“I want the 401(k) for myself, but I don’t want my employees in it.”

Retirement plans are subject to rules about employee eligibility and participation.

Exactly how those rules apply depends on your plan and your workforce.

This is one of those situations where getting advice before there’s a problem is much easier than fixing one afterward.

Do I Have to Close My 401(k)?

Not necessarily.

You may be able to transition from an owner-only 401(k) into a retirement plan that covers eligible employees.

In other words, hiring doesn’t necessarily mean you’re giving up your 401(k).

It may mean your retirement plan needs to grow along with your business.

Your Retirement Plan May Need to Change

This is where the conversation gets bigger than:

“What happens to my Solo 401(k)?”

Now we need to think about the business you’re building.

You may need to consider things like:

• Employee eligibility
• Employer contributions
• Plan administration
• Payroll
• Ongoing compliance
• Employee education

You don’t need to become an expert in all of this.

But you do need a retirement plan that’s designed for the business you have now, not just the business you had when you were working alone.

Don’t Wait Until Your Employee Becomes Eligible

This is probably the most important part.

If you’re planning to hire, start the retirement plan conversation early.

Don’t wait until an employee has been with you for months and then wonder whether something should have happened.

Retirement plan rules can be complicated.

And your existing Solo 401(k) provider may not offer the type of plan you’ll need as your business grows.

Knowing your options ahead of time gives you much more room to make thoughtful decisions.

Growth Is a Good Problem to Have

Hiring your first employee is a big milestone.

Your business is changing.

Your retirement plan may need to change with it.

And that isn’t necessarily a bad thing.

A retirement plan can become part of how you:

• Save for your own retirement
• Attract employees
• Retain great people
• Build a benefits package
• Support the next stage of your company

What started as a retirement account for one person can eventually become an important employee benefit.

Key Takeaway

Hiring an employee doesn’t automatically mean you have to close your Solo 401(k).

But it can change the rules.

The answer depends on your employee, your plan, your business and how everything is structured.

The biggest mistake is assuming you’ll figure it out later.

If you’re growing from a one-person business into an employer, this is a great time to review your retirement plan and make sure it’s ready to grow with you.