What Happens to a Solo 401k If You’re No Longer Self-Employed?

Losing your Solo 401k eligibility might feel like a setback, but it is a normal part of business growth. Maybe you hired your first employee or shifted to a role that no longer qualifies as self-employment. Either way, the rules around Solo 401k accounts are clear: once certain employment thresholds are met, the plan can no longer stay “solo.”

Starting in 2025, the definition of who counts as an eligible employee expands. This change could affect more business owners than before.

This guide explains what happens when you are no longer eligible for a Solo 401k, what to expect if you hire a full-time W-2 employee, and what options you have moving forward. Whether you upgrade the plan or roll it over, you have several ways to stay on track for retirement.

Who You Can and Cannot Hire With a Solo 401k

Solo 401k plans are designed for self-employed individuals without full-time employees. But that does not mean you cannot hire anyone at all. The key factor is whether your workers meet the definition of a common-law employee who becomes eligible to participate in the plan.

Under IRS rules, your Solo 401k must convert to a traditional 401k — or be terminated — once a non-spouse employee becomes eligible to defer contributions.

Starting in 2025, the eligibility rules will become stricter.

Who Is Still Allowed Under Solo 401k Rules?

Some workers do not count against Solo 401k eligibility and may still be hired:

✅ Your spouse — They are the only exception to the no-employee rule. A spouse can work full-time in your business and still be covered under the Solo 401k.

✅ Employees under age 21 — They are not eligible to join the plan, so they do not affect your Solo 401k status.

✅ Part-time employees who work under 500 hours per year — These workers remain excludable from the plan, even under the new 2025 rules.

✅ Independent contractors (1099 workers) — Because they are not common-law employees, they do not trigger Solo 401k ineligibility.

✅ Certain union employees — Workers covered by a collective bargaining agreement may be excluded if retirement benefits were part of good-faith bargaining.

✅ Nonresident aliens with no U.S.-source income — These individuals may be excluded from the plan if they do not earn income from U.S. sources.

Solo 401k status only ends when a common-law employee becomes eligible to contribute. This typically happens after working 1,000 hours in a 12-month period, or (starting in 2025) after reaching 500 hours per year for two years in a row.

📝 Note: The “500 hours in two years” rule begins with hours worked in 2024. That means the first time it will apply is in 2026, for employees who meet the threshold in both 2024 and 2025.

What Happens to My Solo 401K Account if I Hire an Employee?

Hiring your first employee is a big step for your business and it may also mean the end of your Solo 401k. However, your plan does not become disqualified the moment someone joins your team. You remain eligible until that employee becomes eligible to participate in the plan.

This typically happens after they complete one year of service and work at least 1,000 hours. Starting in 2025, the IRS also requires eligibility for employees who work 500 or more hours per year in two consecutive years.

Once that threshold is met, you must take action before the employee’s official entry date as listed in your Solo 401k plan document.

There are two main ways to handle this:

Option 1: Upgrade to a Traditional 401k Plan

Some business owners choose to convert their Solo 401k into a full employer-sponsored 401k. This lets you continue contributing to your own account while allowing your new employee to participate.

But this option comes with added complexity:

✅ Annual Form 5500 filing is required.
✅ You may need third-party administration services.
✅ Nondiscrimination testing applies, unless you use a safe harbor design.
✅ An ERISA fidelity bond is usually required.
✅ Your investment options must meet fiduciary standards.

Because of these requirements, this path tends to work best for businesses planning to hire and grow their team over time.

📝 Note: If you go this route, be sure to amend your plan before the new employee’s eligibility date. This helps avoid compliance issues.

Option 2: Terminate the Plan and Rollover to an IRA

Most Solo 401k owners choose this path. Ending the plan and rolling over the funds into an IRA is typically more straightforward and avoids the added complexity of a traditional 401k.

Here is how it works:

✅ Request a direct trustee-to-trustee rollover to avoid taxes and penalties.
✅ Move all funds and assets to a rollover IRA, which is an individual account not tied to your business.
✅ Notify your plan provider that you are terminating the plan.
✅ File Form 5500-EZ to formally close the plan for that tax year.

The deadline to file Form 5500-EZ is the last day of the seventh month after your plan year ends. If your plan follows a calendar year, that means the form is due July 31.

📝 Note: Late filings can result in steep penalties. However, the IRS offers relief programs if you miss the deadline.

📌 You can learn more about the 5500-EZ here.

Wrapping Up

If your business grows to include a full-time W-2 employee, your Solo 401k will generally no longer meet eligibility requirements once that employee qualifies to participate. This usually occurs after one year of service or, starting in 2025, after two consecutive years of 500 or more hours worked.

At that point, you may need to take action. Some business owners choose to upgrade their plan to a traditional 401k, especially if they plan to keep growing their team. Others may decide to close the Solo 401k and roll the assets into an IRA to keep things simpler. Direct rollovers are a common option and help avoid tax withholding on the transfer.

Depending on your business goals, you might also consider other small business retirement plans like a SEP IRA or SIMPLE IRA. Each has its own rules, costs, and potential benefits, so it may help to compare the options before you make a change.

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