Why "solo" matters
A plan that covers any common-law employee falls under Title I of ERISA: fiduciary rules, reporting, bonding and the rest. A plan with no employees as participants does not. A Department of Labor regulation, 29 CFR 2510.3-3, says who does not count as an employee for this purpose.
Staying outside Title I is what keeps a one-person plan simple: no nondiscrimination testing against staff, no participant notices for employees, a short annual return on Form 5500-EZ, and no premiums to the Pension Benefit Guaranty Corporation. The Internal Revenue Code's rules still apply in full: a written plan, minimum funding, contribution limits and the rest.
One consequence to know: outside Title I, the plan does not have ERISA's protection against creditors. In bankruptcy, federal law protects tax-qualified plans either way; outside bankruptcy, protection depends on your state's law.
Who is not an employee
Under the regulation, these people are not treated as employees, so covering them keeps the plan outside Title I:
| Owner | Can be covered without Title I? |
|---|---|
| Sole proprietor or single-member LLC | Yes |
| 100% owner of an S or C corporation | Yes |
| A married couple who together own 100% of a business | Yes |
| The spouse of any of the above | Yes |
| Partners in a partnership, and their spouses | Yes |
| Two or more unrelated shareholders of a corporation | Uncertain; see below |
| Children, parents or other relatives who work in the business | No. Only a spouse is named |
Partnerships, including multi-member LLCs taxed as partnerships, are outside Title I when only partners and their spouses are covered. They need a different plan design, because the partnership adopts one plan for all the partners. See partners and multi-member LLCs.
Corporations with unrelated co-owners
The regulation's exemption for corporations covers a business "wholly owned" by one person, or by one person and their spouse. Two unrelated shareholders of a corporation fit neither that exemption nor the one for partners. A Department of Labor advisory opinion from 1976 reads the corporate exemption the same narrow way.
The IRS's Form 5500-EZ instructions treat a 2% shareholder of an S corporation like a partner for deciding who may file that form, but that is a filing rule, and the Department of Labor regulation says nothing similar. Whether a plan covering two unrelated S or C corporation shareholders is outside Title I is therefore uncertain.
Related businesses can bring in employees
Even when your own business has no staff, the tax rules may treat you as employing the staff of another business. Several businesses can be treated as a single employer, and a plan that covers only you then has to pass coverage tests counting everyone in the group. A plan covering only the owner would fail those tests, which can disqualify it.
Three sets of rules do this:
- Controlled groups (IRC 414(b) and (c)). A parent-subsidiary group exists when one business owns 80% or more of another. A brother-sister group exists when the same five or fewer people own at least 80% of each business and, counting only identical ownership, more than 50%. If you own all of your consulting business and 80% or more of a clinic with employees, those employees count.
- Affiliated service groups (IRC 414(m)). These catch service businesses that work together, with or without 80% ownership. A common example: your own professional corporation is a partner or shareholder in a group practice with employees and performs services for it. Businesses whose main job is managing one other organization can also be caught. Health, law, accounting, consulting, engineering and similar fields are the usual cases.
- Leased employees (IRC 414(n)). Someone who works for you substantially full time for a year or more through a staffing firm or PEO can be treated as your employee.
See the glossary entry on controlled groups.
Family ownership counts too
Ownership is not only what you hold in your own name. For controlled group purposes, you are generally treated as owning:
- your spouse's interest in a business, unless a narrow exception applies: you have no interest in it, no role in running it or working in it, it does not earn mainly passive income, and there are no restrictions on its sale in your favor
- the interests of your children under 21
- in a business where you own more than half, the interests of your adult children, parents, grandparents and grandchildren
So owning part of another business that has employees, or being married to someone who does, can mean those employees count. Since 2024, living in a community property state no longer makes spouses' businesses related on that ground alone, and a shared minor child no longer links two parents' separate businesses by itself.
Maxed's estimate asks about businesses owned by you, your spouse, your children and your parents before showing a figure: who owns the other business, roughly how much of it your family holds, and whether your businesses work together. A clear controlled group (80% or more) or a firm you own part of and work with goes to the waitlist; anything less clear-cut goes ahead, and the ownership is confirmed with you before any documents are drafted.
Contractors
A genuine independent contractor paid on a 1099 is not your employee and does not affect the plan. The test is not the tax form but the relationship: if you have the right to control and direct both what the person does and how they do it, they may be a common-law employee whatever their paperwork says.
A contractor who works full time, only for you and on your direction is the classic misclassification risk. If such a person is in substance an employee, the plan may have had to cover them. If you rely on regular contractors, get advice on their status before relying on a solo plan.
A spouse on payroll
A spouse who works in the business does not bring the plan under Title I. Your spouse can be covered, and their benefit is limited by their own pay, so a spouse needs real wages (in a corporation) or earned income for real work. Adding them gives the plan a second set of limits, based on the spouse's own age and pay.
A spouse on payroll also counts for a minimum participation rule, IRC 401(a)(26), which requires a defined benefit plan to give a meaningful benefit to at least two employees when there are two or more. So once a spouse on payroll meets the plan's age and service conditions, expect the plan to need to cover them. The actuary designs for this.
Any other relative on payroll, such as an adult child, is an ordinary employee for these purposes, and the plan is no longer solo.
When things change
Eligibility is not a one-time check. Hiring someone who meets the plan's age and service conditions, buying into another business, changing entity type or a change in marriage can each end a plan's solo status. The rules on what happens next are in what happens when you hire.
If you have a job as well as your own business, the employer is unrelated and its employees don't count. See a W-2 job and a side business.