How SECURE Act 2.0 Changed the 401(k) Controlled Group Rules

The SECURE Act 2.0 went into effect in late 2022 in an effort to incentivize more employers, particularly small businesses, to offer retirement savings plans to their employees. The Act expands automatic enrollment in retirement plans, increases catch-up contribution limits for older workers, and provides additional tax incentives for small businesses to establish retirement plans, making it easier for more Americans to save for retirement.

One of the lesser known but critical parts of the legislation, however, is how it affects 401(k) plan access for self-employed individuals.

What Is a Solo 401(k) Structure?

A Solo 401(k) is a tax-advantaged retirement savings account designed for self-employed people. You can open one with a qualified custodian as long as you have an EIN, or employer identification number. There are no age requirements for a Solo 401(k), and you can have one as long as you don’t employ other people (other than a spouse).

Similar to an IRA, there are two main types of Solo 401(k)s:

• Traditional 401(k): Contributions are made with pre-tax dollars, reducing your taxable income for the year. You only pay taxes when you withdraw the money in retirement.
• Roth 401(k): Contributions are made with after-tax dollars, meaning you pay taxes upfront. The money grows tax-free, and qualified withdrawals in retirement are also tax-free.

Why Open a Solo 401(k)?

A Solo 401(k) is unique in that it allows you to contribute to your retirement savings both as an employer and as an employee. As an employee, you can contribute up to the annual limit of $23,500 in 2025, plus an extra $7,500 if you’re older than 50. As the employer, you can also contribute up to 25% of your annual compensation (up to $350,000), allowing for potentially much higher total contributions than an IRA, which has lower annual limits.

A few reasons why you may want to open a Solo 401(k) include:

• Higher contribution limits: A Solo 401(k) allows higher contribution limits compared to other retirement accounts like IRAs, enabling more savings for retirement.
• Tax benefits: Contributions can be tax-deductible, reducing taxable income for the year. You can also grow your investments tax-deferred until retirement.
• Flexibility: You can contribute both as an employee (salary deferral) and as an employer (profit-sharing), giving you more control over how much you contribute.
• Loan option: You can borrow from your Solo 401(k) if needed, providing more flexibility in case of emergencies or large expenses.

Solo 401(k) Contribution Limits

The Solo 401(k) contribution limits for 2024 and 2025, respectively, are as follows:

What Does a Controlled Group Mean for a Solo 401(k)?

The main element of how SECURE 2.0 impacts Solo 401(k)s is how the legislation treats “controlled groups.” A controlled group refers to how the IRS views multiple businesses owned or controlled by the same individual. These rules are in place to prevent business owners from arbitrarily splitting up their businesses into separate entities to take advantage of retirement plan contribution limits or to avoid other rules, such as required minimum distributions.

SECURE 2.0 lowers the amount of ownership needed for businesses to be grouped together as part of the same "controlled group." This means that businesses with shared or overlapping ownership are more likely to be treated as one single business for retirement plan rules.

The law also includes situations where someone controls a business indirectly—like if they own the business through a trust, estate, or another company. These businesses could also be treated as part of the same controlled group for retirement plan purposes.

The Impact of SECURE 2.0 on Solo 401(k)

The key changes are as follows:

• Contribution limits: If you own multiple businesses that are now grouped together under the new rules, you'll have a single limit on how much you can contribute to all your Solo 401(k) plans combined. This means you might not be able to contribute as much as you could previously when each business was treated separately.
• More compliance requirements: You might need to review your retirement plans to ensure they follow the new rules about controlled groups. This could involve keeping more detailed records and performing additional administrative work.

Solo 401(k) Compliance Under SECURE 2.0

In order to comply with the recent rules, it’s critical to take the following steps in an effort to stay within the legal guidelines while still making the most of your retirement savings plan:

• Assess business ownership: If you’re a solo owner of multiple businesses, you should perform a detailed review of how your businesses are structured. Be sure to double-check any businesses you may indirectly own through family members, inheritances, or trusts.
• Analyze 401(k) contributions: If your businesses now fall into a controlled group under the new SECURE 2.0 rules, you may need to reevaluate your contributions to your Solo 401(k) to ensure you’re staying within the IRS’ contribution limits.
• Update plan documents: Plan documents typically serve as the legal guide to how your retirement plan is run, and include eligibility requirements, contribution requirements and benefit calculations. If changes to your ownership structure impact how you manage your retirement plans, you may need to update your plan documents to ensure they comply with the new rules.

The new controlled group rules are complex, so it's important to speak with a tax professional or retirement plan expert to determine if your businesses are now included under the updated controlled group definitions. If this is the case, it may make sense for you to explore other tax-advantaged retirement savings options that allow greater flexibility for solo owners of multiple businesses.