“No Employees” Is a Legal Conclusion, Not a Headcount

Every plan in the preceding section — Solo 401(k) above all — rests on the premise that you have no employees other than a spouse. Before you rely on that, understand that the IRS does not ask how many people work for this company. It asks how many work for every business you control, aggregated, and it has two separate rules for doing the aggregation.

Controlled groups. Under IRC §414(b) and IRC §414(c), businesses under common ownership are treated as a single employer. The two common shapes are parent-subsidiary (one entity owns 80% or more of another) and brother-sister (five or fewer individuals own 80% or more of each business and hold more than 50% in identical ownership across them). Own a consulting LLC with no staff and 90% of a restaurant with fourteen employees, and for retirement plan purposes you have one employer with fourteen employees. The Solo 401(k) you opened for the consulting practice is not a Solo 401(k); it is a defective 401(k) that has been excluding eligible participants, and the correction is retroactive.

Affiliated service groups. IRC §414(m) is the rule that catches people who checked the ownership math and thought they were clear. An affiliated service group can exist between service organizations that regularly work together with minimal or no common ownership at all — the classic case being a professional practice and the management company that serves it, or a group of physicians who each own their own PC and jointly own the surgery center. Ownership percentages that look safe under §414(b) do not settle the §414(m) question, and the analysis is genuinely hard. If you own pieces of more than one business and any of them share clients, staff, or services, this is worth an hour of an ERISA attorney’s time before you adopt a plan, not after the IRS asks.

Why it matters more than it sounds. Aggregation does not merely add people to your census. It determines who must be covered under IRC §410(b), whose compensation enters the nondiscrimination tests, and whether your plan is top-heavy. A plan that fails coverage can be disqualified, which makes every dollar in it immediately taxable to every participant — including you, on the entire balance. Set against that, the cost of getting an opinion is a rounding error.