Solo 401(k) Plans: A Guide to Compliance and Form 5500

Solo 401(k) plans offer owner-only businesses an excellent way to save for retirement with high contribution limits and tax advantages. However, maintaining compliance with these plans is essential to avoid costly penalties and ensure long-term benefits. Whether you choose to manage the plan yourself or hire professional assistance, understanding the basics is key.

To help, we collaborated with Keith Dunn, a professional Third-Party Administrator (TPA) at Professional Benefit Services and retirement plan expert, to create a guide to provide guidance and clarity.

Why Are Solo 401(k) Plans Misunderstood?

1. Blurring Personal and Business Roles
   A Solo 401(k) is established by a business entity (even if it’s just you), adding complexity compared to a standard individual retirement account (IRA).
2. Compliance Overlaps
   Solo 401(k) plans fall under both Department of Labor (DOL) and IRS regulations, increasing the chances of misunderstandings or oversights.
3. Controlled Group Rules
   Ownership of another business or a spouse’s related plan can affect filing thresholds, which many people discover too late.
4. Employee Misclassification
   Hiring employees—even part-time—can disqualify a plan as a “Solo” 401(k), changing its compliance requirements.

When Is Form 5500 Filing Required?

Filing a Form 5500 is the most frequently overlooked requirement. If you sponsor a Solo 401(k), filing Form 5500 is typically required under two conditions:

1. Plan Assets Exceed $250,000
   When plan assets (including controlled group plans) exceed $250,000 at the end of the year, filing is mandatory.
2. Plan Termination
   Even with assets below $250,000, terminating the plan requires a Form 5500 filing to ensure proper closure procedures, final distributions, and compliance checks.

Controlled Group Considerations

If you or your spouse owns multiple businesses that meet certain ownership thresholds (a “controlled group”), you may need to aggregate assets across plans. This could push your total plan balance above $250,000, triggering a filing requirement. Failing to account for this can lead to penalties.

How to File Form 5500

If you plan to manage the process on your own, follow these steps to file through the DOL’s EFAST2 system:

1. Create an EFAST2 Account
   Register for a username and password on the platform.
2. Select the Correct Form
   Use Form 5500-EZ for Solo 401(k) plans. Unlike other versions, this form is not publicly disclosed.
3. Complete Plan Details
   Accurately input plan year information, total contributions, and plan assets. Be sure to follow the IRS Instructions for Form 5500-EZ to avoid errors.
4. Submit Electronically
   Review your submission carefully and file through EFAST2 by the deadline.

Professional Benefit Services also has a downloadable EFAST2 Registration Instructions PDF as a quick guide for you!

Filing Deadlines

• Standard Deadline: The last day of the seventh month after the plan year ends (typically July 31 for calendar-year plans).
• Extensions: File Form 5558 for an extension (usually until October 15) before the original deadline to avoid penalties.

Steps to Take If You Miss a Filing

If you’ve missed filing Form 5500 for one or more years, follow these steps to correct the issue:

1. Gather Your Records – Collect your Solo 401(k) year-end statements to determine which years require a filing.
2. File the Missing Forms – Submit Form 5500-EZ for each delinquent year. Your TPA can assist with proper filing to ensure compliance.
3. Use Correction Programs – Take advantage of available correction programs to minimize penalties. The IRS’s Delinquent Filing Penalty Relief program limits your penalty to $1,500, regardless of how many filings were missed, as long as you’re not under examination. Another option is the “reasonable cause” approach, but this requires extensive documentation and is subject to a strict case-by-case review.
4. Prevent Future Issues – Set reminders for filing deadlines and consider hiring a professional to handle annual filings, so you don’t miss them again.

A qualified Third-Party Administrator (TPA) who specializes in retirement plans can help you navigate the correction process, prepare the necessary forms, and file them on your behalf. Taking these steps will help you correct past mistakes, minimize penalties, and keep your Solo 401(k) in compliance.

Common Pitfalls and How to Avoid Them

1. Misreporting Assets
   Ensure plan balances match year-end statements or 1099-R forms. Even small discrepancies can raise red flags.
2. Incorrect Participant Counts
   Solo 401(k) plans typically cover only the business owner (and possibly a spouse). Adding employees may disqualify the plan.
3. Exceeding Contribution Limits
   Contribution limits are set annually by the IRS and based on earned income. Exceeding limits can lead to corrective distributions and tax consequences.
4. Ignoring Controlled Group Rules
   Ownership in multiple businesses can alter contribution limits and filing obligations.
5. Missing Deadlines
   Late filings can result in fines up to $250 per day. Use a calendar or request an extension to stay on track.
6. Underestimating Complexity
   Despite their name, Solo 401(k) plans are still subject to extensive 401(k) regulations. Loans, rollovers, and different contribution types can complicate matters.

Benefits of Professional Assistance

Managing a Solo 401(k) independently can be challenging. Professional help offers:

• Compliance Assurance: Experts like Third-Party Administrators (TPAs) can identify potential pitfalls.
• Time Savings: Delegating administrative tasks frees you to focus on your business.
• Penalty Avoidance: Professionals help ensure filings and compliance requirements are met, reducing the risk of costly penalties.

A team like Keith’s at Professional Benefit Services can take this work off your plate and ensure all requirements are met.

Additional Considerations

• Plan Year vs. Calendar Year: Filing deadlines depend on your plan year, so confirm whether it aligns with the calendar year.
• Plan Documents: Keep signed trust documents readily available for audits or compliance checks.
• Audits and Recordkeeping: Retain accurate records of plan activity to simplify audits.
• Plan Terminations: Follow formal procedures, including final Form 5500 filings and participant notifications.

Final Thoughts

Solo 401(k) plans offer flexibility and tax advantages for owner-only businesses but require careful attention to compliance. Whether it’s filing Form 5500, managing controlled groups, or navigating contribution limits, professional advice can ensure your plan remains compliant and optimized.

Bottom Line: Staying proactive with your Solo 401(k) plan protects your retirement assets and provides peace of mind. If you have questions or need assistance, don’t hesitate to reach out. We’re here to help you achieve financial success while staying on solid regulatory footing. Looking for more ways to reduce your tax bill this year? Download our Tax & Strategy Guide for expert tips!