If a common-law employee becomes eligible to participate in your Solo 401(k), your plan will need to transition to a standard 401(k). This article explains when and how that transition happens, what changes to expect, and how to prepare. Expand the sections below to learn more.
If you have a Solo 401(k) and employees other than co-owners, business partners, or spouses meet the plan's eligibility requirements, your plan can continue with Gusto Retirement. However, it will need to transition to a standard 401(k).
A task will appear on your dashboard to confirm the employee's status: owner, business partner, spouse, or common-law employee. Complete it as soon as possible so we can adjust your account.
Important: Family members other than spouses are common-law employees unless they are also part-owners.
Here's what to expect after completing the task:
Owner, business partner, or spouse: No further action is needed. Your plan stays the same.
Common-law employee: Your plan automatically upgrades to a standard 401(k) in our Core pricing tier once they become eligible to participate.
If you do not complete the task before the employee becomes eligible, we automatically upgrade your plan to our Core tier within 30 days of their eligibility.
30 days after a common-law employee becomes eligible to participate, we upgrade your plan to a standard 401(k) in our Core pricing tier.
A Solo 401(k) is intended for self-employed owners and similar business types. Your plan must upgrade to a standard 401(k) once common-law employees become eligible to participate.
To delay the transition, you can set eligibility requirements that employees need to meet before joining your standard 401(k). For example, you can increase a service requirement to up to 12 months, or set a maximum age requirement of 21. This needs to be done before the common-law employee meets the current eligibility requirements.
Important: Eligibility requirements must be set before an employee becomes eligible. Contact our Retirement Sponsor Support team to make these changes.
Transitioning from a Solo 401(k) to a standard 401(k) affects your plan's cost structure, features, and regulatory obligations.
Your fee structure moves to our Core tier to reflect the added complexity of managing a plan with employees. Review Gusto Retirement's standard 401(k) pricing to understand the change in costs.
Solo 401(k) plans are exempt from certain IRS nondiscrimination tests because of who participates. Once your plan covers a common-law employee, it is subject to annual testing to make sure all employees are treated fairly. Failing these tests can have consequences for your plan and its participants.
To avoid this, consider adopting a safe harbor 401(k) plan design. Safe harbor plans are generally exempt from most annual nondiscrimination testing.
Pro tip: Consider adding safe harbor before you hire a common-law employee. There are timing requirements, and safe harbor plans are generally exempt from most annual nondiscrimination testing.
Once your plan transitions, your service agreement is updated to reflect the new services, pricing, and regulatory requirements. To review the amendment, go to Resource Library in your 401(k) administrator dashboard.
To customize your standard 401(k) plan design before transitioning — like adding an employer match, changing vesting schedules, setting employee eligibility requirements, or adopting safe harbor — contact our Retirement Sponsor Support team.