Childhood is a time of acquiring lots of behaviors that will be useful for the rest of life. Just as learning to speak would be difficult if the child was never allowed to attempt to make the sounds, so too learning to deal with money is difficult if the child is never given the opportunity to attempt to handle it.

Learning how to earn money, be productive, and perform a job are all important lessons to learn. Being employed by your parents at young ages helps to learn those lessons in a safe space.

I recently received the following reader question:

Can we employ our daughter while we have a solo-401(k) plan?

Yes, you can, but you may not be able to keep your solo-401(k) plan at your current custodian.

The term “solo-401(k)” denotes a type of 401(k) plan which is easier for custodians to run and thus cheaper to establish. There are many custodians which offer easy-to-set-up, cookie-cutter solo-401(k) plans. However, the custodians also typically have rules where if you have too many participants, you will need to find a new custodian or move to a multi-participant plan type which has higher fees.

Regardless of all this, in the eyes of the IRS, all individual, solo, self-employed, or whatever other term they use 401(k) plans are merely examples of a 401(k) plan. And basically all 401(k) plans are subject to the same rules. It is only by virtue of the small number of participants that solo-401(k) plans appear to be exempt.

As the IRS clearly states:

No matter what the 401(k) plan is called by a plan provider, it must meet the rules of the Internal Revenue Code. If you hire employees and they meet the plan eligibility requirements, you must include them in the plan and their elective deferrals will be subject to nondiscrimination testing (unless the 401(k) plan is a safe harbor plan or other plan exempt from testing).

In this way, if an employee (your child or otherwise) does qualify to participate in the 401(k) plan, then he or she needs to be permitted to participate. This may mean that you need to move the plan to a custodian who supports multiple participant 401(k) plans.

Each 401(k) plan, including solo-401(k) plans, is governed by a plan document which defines who counts as an employee under the plan.

You can find out if your child or other employee qualifies by reviewing your 401(k) plan document. For example, there may be limits to participation based an employee’s age, cumulative hours worked, or part-time status.

Once you find out how your 401(k) plan document works, consider taking notes and keeping them somewhere easy to reference. Knowing what employment arrangements affect your retirement plan may prove helpful again later.

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