Top 3 Mistakes in Solo 401(k) Plans


Solo 401(k) plans have been on the rise in popularity. These plans are for self-employed individuals with no other common law employees who seek to maximize their contributions. As with its rise in popularity, there are a few common mistakes seen in administering these types of plans, as follows:

1. Failure to Update/Amend the Plan Document: Every 6 years, the plan document needs to be restated to conform to new law changes. The latest restatement period (PPA Restatement) ended as of April 30, 2016. The company who creates the plan document should be keeping in contact with their clients about the restatement and do the updates on the plan document. Failure to keep the plan in compliance with federal regulations may result in penalties and revocation of tax status.

2. Using an LLC (Limited Liability Company) without wages or earned income: While an LLC may adopt a Solo 401(k), an LLC that owns rental properties is not a proper entity to establish a Solo 401(k) plan. The LLC receives "rental income" and the owners are not considered "employees" receiving wages or earned income that may be contributed to the retirement plan. Rental income cannot be contributed to a retirement plan, and as a result the owner is not an employee or person receiving earned income. As a requirement, all 401(k) plans must be established by a company for the benefit of its employees with wages or earned income.

3. Failing to File Form 5500: Generally, 401(k) plans are required to file a return on a Form 5500. Solo 401(k) plans have some exemptions to the filing requirement, but there are some situations where the filing may be necessary. One instance where the filing is required, is when the Solo 401(k) plan has over $250,000 in assets. Another instance is when the plan is terminated. Since a filing will be needed eventually, we recommend a Form 5500 filing be done each year starting with the first year the plan is established. Each filing sets the statute of limitations; without the filing, and no set statute of limitations, each plan year would be open for IRS examination.

Black Creek Retirement Plans, Inc. can assist you with the annual maintenance; plan document and amendments; as well as the annual Form 5500 filings. Contact us to learn more about our services.