The problem with Solo 401(k) plans

Solo 401(k) plans are a great benefit for sole proprietors. I know, I have one. The problem is they are on the Internal Revenue Service’s (IRS’) radar.

The IRS’s Tax Exempt and Government Entities division has identified one-participant 401(k) plans as among its current audit initiatives. Why? They’re usually run with very little administration and assistance to these solo 401(k) plan sponsors. Solo 401(k) plans are subject to the same rules and requirements as any other 401(k) plan, but they aren’t run that way.

Some solo 401(k) plans have huge compliance issues, such as not covering employees for coverage (which means they should have non-Solo 401(k) plan in place). Some solo 401(k) plans don’t file a Form 5500, even though they have to when $250,000 or more are in the plan. There could be a violation of the plan sponsor exceeding the contribution and deduction limits, as well as controlled group/affiliated service group rules. So expect solo 401(k) plans that are. Not in compliance to be audited in the near future.

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