Solo vs. Group Plans: Determining Eligibility

Knowing whether you qualify for a solo plan or a group plan is important because it affects whether you can fund a plan just for yourself or if you must also provide contributions for your employees.

• Solo Plan: If you qualify, funding is guided by IRS rules and your plan document. Solo plans generally offer few restrictions, allowing for larger and more flexible contributions.

• Group Plan: If you have a group plan, you must perform discrimination testing, which adds complexity, limits funding amounts, and requires contributions for eligible employees.

Eligibility Guidelines:

• If you’re an S-Corp, C-Corp, or sole proprietor and the only person working in your company, you qualify for a solo plan. Sole proprietors don’t need to pay themselves a W-2 wage, but S-Corp and C-Corp owners must be on payroll.

• Your spouse can also be employed and paid a W-2 salary without affecting solo plan status. Being married and both employed under the company structure still qualifies as a solo plan.

• Having employees doesn’t automatically create a group plan. Employees must meet minimum eligibility requirements, which are detailed in your plan document. You may still maintain solo plan status even if you have employees, depending on these rules.

Common Employee Exclusions:

1. Employees under age 21.

2. Employees who work fewer than 1,000 hours during the plan year.

3. Employees who start mid-year, based on the plan’s entrance date restriction.

If you own both companies, then you will have to cover all employees because of the control group rules.

However, there are some eligibility restrictions. You do not have to contribute for the following employees:

• Those under the age of 21;

• Those who work less than 1,000 hours; and

• Most importantly, employees who were hired during a given year.

In addition, depending on the number of employees and eligibility, your plan will probably cost an extra $1k to $2k a year to administer. So you’ll want to assume that higher cost.

How Employee Leasing Works

Employee leasing is an arrangement where a business contracts with a third-party organization—often a professional employer organization (PEO) or staffing agency—to provide workers. These leased employees remain on the payroll of the leasing company, which handles administrative tasks such as payroll, benefits, and tax compliance.

The hiring business manages the employees’ day-to-day work but avoids many administrative responsibilities. Employee leasing can be a cost-efficient way to scale the workforce quickly without managing the complexities of direct hiring.

Impact on Retirement Plans: Leased employees can affect a company’s retirement plan obligations. The IRS requires that leased employees who meet specific criteria—typically at least one year of service and 1,000 hours worked—must be included in either the leasing company’s or the client company’s retirement plan, depending on the agreement. This can increase retirement plan costs, as contributions and benefits must be provided in accordance with plan rules and nondiscrimination requirements.

Additionally, leasing arrangements can complicate retirement plan compliance. The IRS and Department of Labor enforce strict rules regarding eligibility, participation, and contributions to ensure fairness.

Businesses must conduct careful due diligence when working with leasing organizations to ensure leased employees are treated equitably. Clear communication between the business, leasing company, and plan administrators is critical to maintaining compliance and avoiding penalties, plan disqualification, or disruptions to workforce and retirement benefits.

What is the Pension Benefit Guaranty Corporation (PBGC)?

The Pension Benefit Guaranty Corporation (PBGC) is a U.S. government agency created under the Employee Retirement Income Security Act of 1974 (ERISA). Its main role is to insure participants in private company defined benefit pension plans, acting as a safety net so employees still receive a basic level of retirement benefits if their employer’s plan becomes insolvent or is terminated without enough funds.

The PBGC collects insurance premiums from covered plans and invests them to support its mission. If a plan cannot pay promised benefits due to financial problems or termination, the PBGC assumes responsibility and pays benefits up to legal limits. This includes coverage for cash balance plans, ensuring participants receive their promised retirement benefits even if the plan can’t meet obligations.

Understanding the PBGC is important for knowing the protections in place for retirement savings, especially as cash balance plans become more common. The PBGC helps secure the retirement income of millions of U.S. workers and retirees, providing peace of mind that pension benefits are protected even in cases of employer bankruptcy or financial distress.

PBGC Exemptions

Not all plans are subject to PBGC coverage. Certain employer-sponsored cash balance plans may be exempt if they:

• Are solely for business owners

• Cover no more than 25 active participants and are maintained by a professional service employer

• Serve as excess benefit plans for certain employees

• Are for Indian tribal governments

The key factor is the designation of a professional service employer. While you may consider yourself a professional, the PBGC has specific definitions.

Some examples of professionals exempted from PBGC coverage include:

• Physicians, dentists, chiropractors, and other licensed healthcare practitioners

• Lawyers and CPAs

• Public engineers, architects, draftsmen, and actuaries

• Psychologists, social or physical scientists

• Performing artists

This list is not exhaustive, and there is a process to request a coverage determination from the PBGC. Forms can be submitted by mail or email, with detailed instructions available on the PBGC website.