Can I Contribute to a Solo 401k if My Business has a Loss?
Sometimes things don’t go over swimmingly throughout the year. While everyone hopes that their business has a profit every year, sometimes there’s financial hardship or other external factors that make that just not happen. If that business happens to be attached to a retirement plan, it gets extra concerning. Can an employer that established a Solo 401(k) still be able to contribute even if there’s been a loss in the busines
Author
Josh Cruz
May 4, 2023
Sometimes things don’t go over swimmingly throughout the year. While everyone hopes that their business has a profit every year, sometimes there’s financial hardship or other external factors that make that just not happen. If that business happens to be attached to a retirement plan, it gets extra concerning. Can an employer that established a Solo 401(k) still be able to contribute even if there’s been a loss in the business?
You cannot contribute to a Solo 401(k) plan if the business had a loss. Contributions to the plan are based on the net income of the business, and if there is a loss, there is nothing that can be contributed.
It is unfortunate, but a Solo 401(k) is made with the idea that there will be profits to fund the plan from the business. Thankfully, contributions to a plan are made on a discretionary basis, meaning the employer does not have to make a contribution every year. .
What are the Rules for a Solo 401(k) Plan?
There are not many rules for a Solo 401(k) plan to be considered valid by the IRS. The main points being that you must be self-employed or a business with no full-time rank-and-file employees, but there are a few more minor ones that pop up in some of the IRS’s resources.
The rules for a Solo 401(k) are as follows:
You must be self-employed or a business such as a partnership or corporation
You cannot have any rank-and-file employees
You must be a US Resident
You must be at least 21 years old
Your contributions must be recurring and substantial
The thing that will get someone, if their business has had a loss, is the fact that contributions to the plan must be recurring and substantial. This doesn’t however require that a contribution be made every year. Contributions are discretionary, which can excuse a participant and who is also the employer from making a contribution.
What Can I Do About My Solo 401(k) Plan if My Business Has had a Loss?
Since a Solo 401(k) is based on net income, contributions wouldn’t be allowed. However, there’s also the requirement for there to be recurring and substantial contributions to the plan, so if there was a loss in the business it’s attached to, it needs to be handled quickly.
Missing a year’s contribution due to a business loss, does not automatically put the plan in jeopardy. The IRS generally only deems a plan frozen if there’s three consecutive years where the employer did not make a contribution.
Can I Pay into My Solo 401(k) from Another Business that had a Profit?
If the two businesses are called a controlled group and the income from the other business is greater than the loss of another, the two incomes you have are combined to determine whether a contribution can be made or not. As an example an individual has two completely different businesses.
One had a loss and the other had a profit. Since the two businesses are owned and controlled by you the owner, the incomes from the two businesses are combined since they are considered a controlled group. Keep in mind however if you have a controlled group, neither business must have a rank-and-file employee.
Where Can I Go for Help with My Solo 401(k)?
There are a number of institutions that can help with getting and maintaining a Solo 401(k). SEPira(k) is one of them. They have expert guidance, a state-of-the-art and highly secure platform, and can help with everything regarding recordkeeping. They have seasoned retirement plan consultants that can answer your general compliance questions. Ultimately however you will need to make the final decisions regarding your plan with the help of your tax or legal advisor.
Most other places will just send out the Excel sheets and have their clients manage themselves without guidance.SEPira(k)’s platform on the other hand has compliance speed bumps that not only asks you the right questions to help you understand the rules but also contains educational information to help you have enough information to make the right decision.
SEPira(k)’s system will walk you through each step to make it as stress-free as possible. Not only that, but they really let their clients self-direct their plan. Instead of having restricted packages for a client to select from, their open architecture model allows you to dream what you want in your plan so it’s really a win/win for everyone involved.
Conclusion
Everyone wishes their business would be profitable all the time. Unfortunately, sometimes things happen. The events of the past few years have made it abundantly clear that sometimes, things just go belly-up without warning.
If that happens to a business associated with a Solo 401(k) plan, unfortunately that means you may have to skip that year’s ability to contribute. As the plan is profit-sharing, no profits mean no contributions. The limits are based on the net income of the business after all. The good news at least is that the plan does not have to be discontinued. Contributions are discretionary therefore you have the option not to contribute for a year especially if you have a loss.
Resources
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