Solo 401(k)s and Controlled Group Rules

Are you a business owner trying to save for retirement? Have you heard of a Solo 401(k) before? Solo 401(k)s can be a great avenue to save for retirement; however, you need to be aware of controlled group rules.

In this article, we’ll cover the basics of a Solo 401(k), including how controlled group rules factor into eligibility. If you have questions about your specific situation, contact Kislay Shah CPA US today.

What is a Solo 401(k)?

A Solo 401(k) is a retirement plan designed for self-employed individuals. It works similarly to an employer-sponsored plan, giving you the ability to make both employee and employer contributions. One of the main advantages of establishing a Solo 401(k) is an exemption from ERISA rules, helping keep management costs low.

Solo 401(k)s cannot have other full-time employees. The SECURE Act defines a full-time employee as an individual who completes one year of service with at least 1,000 hours or three years of consecutive service with 500 hours each year.

Factoring in Controlled Group Rules

The IRS implemented controlled group rules to eliminate abuse associated with setting up fictitious companies. Under the Revenue Act of 1964, a controlled group relationship exists between the following groups:

• Parent-subsidiary
• Brother-sister
• Family attribution
• A mix of the above
• Affiliated services

Let’s break down each of these relationships in more detail.

Parent-Subsidiary Relationship

A parent-subsidiary relationship occurs when the two companies are linked via stock ownership. The common parent must own at least 80% of the other company. For example, ABC Inc owns 100% of DEF Inc, which owns 90% of ABC Inc. The parent-subsidiary controlled group would need to establish a 401(k) plan accessible by employees of both companies, precluding eligibility for a Solo 401(k).

Brother-Sister Relationship

A brother-sister relationship occurs if five or fewer owners own at least 80% of the controlling interest in each business. For example, three siblings own all of ABC Inc and DEF Inc. Another test for the brother-sister relationship is that five or fewer common owners have effective control of corporations. Effective control means over 50% voting power.

Family Attribution

Family attribution is the process of treating an individual as having an interest. This applies to close family members, like grandparents and grandchildren. However, spousal rules are treated differently. There is no attribution between spouses if there is no direct ownership or participation by the spouse in the business. If more than 50% of the company’s income is from passive sources, there is also no spousal attribution.

Affiliated Services

Affiliated services are the catch-all rule for controlled group limitations. Affiliated services prevent businesses from establishing a service-based business that is similar to the principal business. Common examples of service-based industries include health, law, architecture, accounting, performing arts, consulting, insurance, and engineering.


If you have ownership in more than one company, it’s important to understand the impact of controlled group rules before starting a Solo 401(k). These rules are in place to prevent employers from setting up personal retirement plans, precluding employees from benefits.

For personalized advice on Solo 401(k)s, contact one of our team members at Kislay Shah CPA PC today to schedule your free consultation at or 646-328-1326.