Solo 401(k) is a "Qualified" Retirement Plan
Don't Wait for Assets to Exceed $250,000 Before Filing Form 5500 - December 8, 2009
Yes, the rules say these plans do not have to file Form 5500EZ until total assets exceed $250,000; however...
If you believe that's in the best interest of the business owner or self-employed individual responsible for maintaining a compliant plan, I have a bridge in Brooklyn to sell you. Hyperlink to bookmark in article below: Form 5500EZ
Before reading about the technical compliance facts about these plans discussed below, I suggest you read Ashlea Ebeling's consumer-friendly article on Forbes.com: "Deadline For Self-Employed Savers" in which yours truly is quoted on the benefits of these plans. Then ask yourself why many institutional providers no longer offer these plans; and why those that do rarely offer the ability to obtain loans or to make after-tax Roth contributions?
I suspect (but can't confirm) they no longer offer these plans since most plan accounts are too small to be profitable. Consider that perhaps they are too small because this plan type is no longer the appropriate plan (or perhaps never was)? As to loans and Roth features, I suspect the providers realize that even the "Simplest" plans are not really all that simple to understand and operate in accordance with the rules; so why complicate things if there's no profit in it?
Selecting the wrong plan can burden the owner-only business or self-employed individual with unanticipated compliance requirements, limit plan contributions (and the resulting benefits at retirement), or lose estate planning opportunities (like those afforded by a Roth 401(k)).
Bottom line: Before you choose (or recommend) a particular plan, consider all available options and weigh all costs... like the cost to engage a pension third party administrator, and the cost of losing future benefits at retirement.
Solo 401(k) is a "Qualified" Retirement Plan
A Qualified Retirement Plan is an employer sponsored retirement plan that satisfies the requirements of Internal Revenue Code Section 401(a) in both its form and operation.
Adoption and maintenance of a compliant plan document typically satisfies the form requirement; operating the plan in accordance with the provisions of the plan document, applicable law and regulations typically satisfies the operation requirement.
If the plan is "qualified," the owner-only business or self-employed individual is entitled to a myriad of benefits and features including but not limited to:
Failure to comply with the aforementioned standards may "disqualify" the plan resulting in a potential loss of the plan’s favorable tax related benefits.
Commentary Regarding the operation of your plan in accordance with the provisions of the plan document, applicable law and regulations... Want to know when you (as the employer) are obliged by regulations to contribute your own (as a W-2 employee) 401(k) deferrals? Here's what one of the world's largest mutual fund providers says on there website:
To learn more about the actual deadline: Participant Contributions are "Plan Assets" After 7 Business Days
Bottom line: You get what you pay for.
Form 5500EZ Filing Exemption if Assets less than $250,000
Consider the following...
Commentary The retirement plans available for owner-only businesses and self-employed individuals are numerous and far more complex than even the most well informed consumer might suspect. Selection of the right plan type, benefits and features portends the plan's ultimate success or failure. Therefore, unless they are familiar with all of the available plan types and features, odds are that they will not choose the optimum plan for their individual situation. See article: Odds Against Choosing the Optimum Plan
Plans for Owner-only Businesses and Self-employed Individuals
SEP, SIMPLE, or SOLO 401(k)? SEPs and SIMPLE plans are typically "IRS model plans" (Form 5305-SEP and Form 5305-SIMPLE). By definition, an IRS model plan's benefits and features are predetermined by the IRS; therefore, they do not require formal plan documents or compliance services. However...
The owner-only business or self-employed individual is solely responsible for monitoring compliance with the rules that govern each respective plan type which include but are not limited to determination of the:
Commentary Selecting the wrong plan can burden a self-employed individual with unanticipated compliance requirements, or it can limit him/her from making higher deductible contributions (or nondeductible Roth 401(k) contributions) that translate into the loss of hundreds of thousands of dollars at retirement, or the estate planning opportunities afforded by the Roth 401(k).
Bottom line: Before you choose a particular plan, consider all available options and weigh all costs... like the cost to engage a pension third party administrator, and the cost of losing future benefits at retirement.
Click here to subscribe or unsubscribe to Milberg Consulting's ERISA Expertise "News & Insights."
© 2009 Milberg Consulting LLC All Rights Reserved
The information provided is intended as a general resource, not as investment or retirement planning, or legal plan compliance advice or counsel. If you consider any actions discussed in this update, we suggest that you consult a qualified planning, tax or ERISA professional. ERISA Expertise LLC and Barry R. Milberg do not warrant and are not responsible for any errors and omissions from this update. Any tax advice included in this written or electronic communication is not intended or written to be used, and it cannot be used, by the taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.