Click here for larger image.
They’re called Solo 401(k), Solo(k), and Individual 401(k). But by whatever name they are called, they provide an opportunity for the self-employed or small business owner with no employees (other than their spouse) to establish 401(k) plans and to max out their deductible retirement plan.
While 401(k) plans were introduced 30 years ago as part of the Tax Reform Act of 1978, the Economic Growth and Tax Relief and Reconciliation Act of 2001 (EGTRRA) made it possible for self-employed or small business owners to enjoy enhanced tax benefits. Staring in 2002, employers could contribute the maximum 25% tax deductible profit sharing contribution in addition to any pre-tax contributions made by an employee/participant. Pre-EGTRRA the employer had to reduce the profit sharing contribution by the amount of the 401(k) contribution.
The new rules applied to both incorporated and unincorporated businesses. Any business that employs only the owner and his or her spouse is a candidate-including C corporations, S corporations, single member LLCs, partnerships and sole proprietorships.
And now 8 years later, practically every major financial service company, e.g., insurance companies, brokerage firms, and mutual funds, offers a low cost Solo 401(k) plan. That’s the good news.
The trade-off is that a Solo 401(k) plan, like a regular 401(k) plan, must meet certain ERISA and Internal Revenue Code requirements. And one of those requirements is the obligation to file Form 5500-EZ if plan assets exceed $250,000. And here’s where there could be bad news.
But sometimes that requirement gets lost in translation, and a self-employed or small business owner whose plan exceeds that threshold doesn’t file the return. It may be because he or she missed the filing after being exempt for several years before the $250,000 threshold was crossed. Or it may be that the financial services firms at which these plans were established did not inform the self-employed or business owner of the filing obligation.
And here’s where the bad news can result. Delinquent Form 5500-EZ is not eligible for the Department of Labor’s Delinquent Filer Voluntary Compliance (DFVC) program which caps penalties at $750 for one delinquent Form 5500 and $1,500 for more than one year, however many years are involved. Thus, there is a potential $15,000 penalty for each delinquent year which plans with at least one non-owner can avoid. And many such plans with lots of employees do take advantage of the DFVC program.
Doesn’t sound fair, does it? It isn’t, and Alex M. Brucker, an attorney with the ERISA law firm Brucker Morra, sent an open letter to the IRS, The Time is Now to Remedy the Inequity Applied to American Small Businesses Respecting the Filing of IRS Form5500-EZ. And according to Mr. Brucker, the IRS is reevaluating the application of the DFVC program to self-employed/owner-only retirement plans. One can only hope. Here is the link (PDF) to his letter by way of BenefitsLink.
Picture credit: The picture above is Lost in Translation which can be found on the Art Day Out on-line gallery. It is hand painted by Brisbane, Australia artist and gallery owner Ania Rigato using artist quality materials and is presented on quality canvas stretched around a 35mm thick wooden frame. The painting continues around the edges allowing a modern frameless look.