Solo 401K Form 5500 Tax Filing and Five-Point Compliance Checklist

by | Jun 22, 2022 | News

Solo 401(k)s have become a popular retirement plan option for self-employed persons. These plans put the business owner in control of the plan but with that control also comes responsibility. Unfortunately, many solo 401(k) plans are not properly maintained and are at the risk of significant penalty and/or plan termination. If you have a solo 401(k), you need to ensure that the 401(k) is being properly maintained. Here’s a quick checklist to make sure your plan is on track:

1. Does your Solo 401(k) need to file a Form 5500-EZ?

There are two primary situations where you are required to file a Form 5500 for your Solo 401(k).

  1. If your Solo 401(k) has more than $250,000 in assets, and
  2. If the Solo 401(k) plan is terminated (regardless of total asset amount).

If either of these instances occurs, then the Solo 401(k) must file a Form 5500 to the IRS annually. Form 5500 is due by July 31st of each year for the prior year’s plan activity. Solo 401(k)s can file what is known as a 5500-EZ. The 5500-EZ is a shortened version of the Standard Form 5500. Unfortunately, Form 5500-EZ cannot be filed electronically and must be filed by mail. Solo 401(k) owners have the option of filing a Form 5500-SF online through the DOL. Online filing is preferred as it can immediately be filed and tracked by the plan owner. In fact, if you qualify to file a 5500-EZ, the IRS and DOL allow you to file the Form 5500-SF online, but you can skip certain questions so that you only end up answering what is on the shorter Form 5500-EZ. We regularly file Form 5500-EZs and 5500-SFs for Solo K clients in the law firm for only $250.

2. Is the plan up-to-date?

The IRS requires all 401(k) plans, including Solo 401(k)s, to be amended at least once every six years. If you’ve had your plan for over six years and you’ve never restated the plan or adopted amendments, it is not compliant and upon audit, you will be subject to fines and possible plan termination (IRS Rev Proc 2016-17). If your plan is out of date, your best option is to restate your plan to make sure it is compliant with current law. On average, most plan documents we see updated every two to three years as the laws affecting

the plan documents change. We’ve had two different plan amendments to our IRS pre-approved plan in the past six years.

3. Are you properly tracking your plan funds?

Your Solo 401(k) plan funds need to be properly tracked and they must identify the different sources for each participant. For example, if two spouses are contributing Roth 401(k) employee contributions and the company is matching employer Traditional 401(k) dollars, then you need to be tracking these four different sources of funds, and you must have a written accounting record documenting these different fund types.

4. Plan funds must be separated by source and participant

You must maintain separate bank accounts for the different participants’ funds (e.g. spouses or partners in a Solo K), and you must also separate traditional funds from Roth funds. In addition, you must properly track and document investments from these different fund sources so that returns to the Solo 401(k) are properly credited to the proper investing account.

5. Are you properly reporting contributions and rollovers?

If you’ve rolled over funds from an IRA or other 401(k) to your Solo 401(k), you should have indicated that the rollover or transfer was to another retirement account. So long as you did this, the company rolling over the funds will issue a 1099-R to you, but will include a code on the 1099-R (code G in box 7) indicating that the funds were transferred to another retirement account, and that the amount on the 1099-R is not subject to tax.  If you’re making new contributions to the Solo 401(k), those contributions should be properly tracked on your personal and business tax returns. If you are an S-Corp, your employee contributions should show up on your W-2 (traditional and roth), and your employer contributions will show up on line 17 of your 1120S S-Corp tax return. If you are a Sole Prop, your contributions will typically show up on your personal 1040 on line 28.

Make sure you are complying with these rules on an annual basis. If your Solo 401(k) retirement plan is out of compliance, get with your attorney or CPA immediately to make sure it is up-to-date. Failure to properly file Form 5500 runs at a rate of $25 a day up to a maximum penalty of $15,000 per return not properly filed. You don’t want to get stung for failing to file a relatively simple form. The good news is there are correction programs offered for some plan failures. But, don’t get sloppy, or you’ll run the risk losing your hard-earned retirement dollars.

Check out the latest  Directed IRA , Ep 62: Solo 401(k) Required Filings and Avoiding Common Mistakes. In this episode Mark and I outline common mistakes made in solo 401(k)s (aka, QRPs) when it comes to creation, documentation, contributions, handling of funds, and filings. They cover plan documents and update requirements (required every 6 years) as well as 5500-EZ solo 401(k) tax return filings.

 

Solo K 5500-EZ Requirement and $15,000 Failure to File Relief

by | Apr 23, 2018 | News

Up close photo of an egg-shaped egg timer.Do you have a Solo 401(k)? Have you been filing form 5500-EZ each year for the Solo 401(k)? Are you aware that there is a penalty up to $15,000 per year for failure to file? While some Solo 401(k)s are exempt from the 5500-EZ filing requirement, we have ran across many Solo 401(k) owners who should have filed, but have failed to do so.

The return a Solo 401(k) files is called a 5500-EZ, and it is due annually on July 31st for the prior year. If you have a Solo 401(k) and you have no idea what I’m talking about, stay calm, but read on.

Benefits of Solo 401(k)s

One of the benefits of a Solo 401(k) is the ease of administration and control, because you can be the 401(k) trustee and administrator. However, as the 401(k) administrator and trustee, it is your own responsibility to make the appropriate tax filings. This would include filing any required tax returns for the 401(k).  Solo 401(k)s with less than $250,000 in assets are exempt and do not need to file a 5500-EZ. All plans with assets valued at $250,000 or greater must file a form 5500-EZ annually. A tax return is also required for a Solo 401(k) when the plan is terminated, even if the plan assets are below $250,000. Recently, more and more Solo 401(k) owners have contacted us because they set up their Solo 401(k) online or with some other company, and were never made aware that they are supposed to file a 5500-EZ when their plan assets exceed $250,000.  Some of these individuals have multiple years in which they should have filed the 5500-EZ, but failed to do so. The penalties for failing to file a 5500-EZ when it is required can be quite severe, with fees and penalties as high as $15,000 for each late return plus interest.

Failure to File Relief

Fortunately, the IRS has a temporary pilot program that provides automatic relief from IRS Late filing penalties on past due 5500-EZ filings.  The penalty relief began as a temporary program in 2014 and was made permanent via Rev Proc 2015-32.

In order to qualify for this program, your Solo 401(k) plan must not have received a CP 283 Notice for any past due 5500-EZ filings, and the only participants of your Solo 401(k) plan can be you and your spouse, and your business partner(s) and their spouse. There is a $500 fee due for each delinquent return up to a total of $1,500 or three years.  This program is available to all Solo 401(k) plans, regardless of whether it is a self-directed plan.

The IRS has provided details via Rev Proc 15-32. In order to qualify and receive a waiver of penalties under the program, you must follow the program exactly.  In short, you must do all of the following:

  1. File all delinquent returns using the IRS form in the year the filing was due. This must be via paper form.
  2. Mark on the top margin of the first page, “Delinquent Return Submitted under Rev. Proc. 2015-32.”
  3. Complete and include IRS Form 14704.
  4. Mail all documents to the IRS, Ogden, UT office.

In sum, if you have a Solo 401(k) plan that should have filed a 5500-EZ for prior years, then you should take advantage of this program, which will save you thousands of dollars in penalties and fees.  If you have any questions about this program or would like assistance with submitting your late 5500-EZ filings under this program, please contact our law firm as we are assisting clients with current and past due 5500-EZ filings for their Solo 401(k)s.

Top Three Mistakes in Solo 401(k) Plans

by | Mar 12, 2018 | News

Photo of an old statue with its palm over its face.Solo 401(k) plans have grown significantly and are often used by self-directed investors. Solo 401(k)s are an excellent tool for self employed persons to maximize contributions in their own business or self-employment just like large companies who offer plans for their employees. The basic rules for solo 401(k)s are that you must be self-employed and that you must have a no other employees other than the business owner and family. As happens with many good things, this is starting to get over-sold and we are seeing common problems arise with persons who create them on-line or with the assistance of someone who has no credentials or experience outside of creating a catchy website. Here are a few things to watch out for.

Top Three Mistakes in Solo 401(k) Plans

1. Failure to Update/Amend– Pursuant to Revenue Procedure 2007-44, 401(k) plans shall be amended and restated every six years to conform with current law. The company who provided your plan document, usually what is called a pre-approved plan document for solo 401(k)’s, should be providing you with these updates so that your plan stays in compliance with the amendment cycles established by the IRS. Failure to properly update the plan can result in significant penalties and revocation of tax status.

2. Using an LLC With Rental Income as The Employer/Company – Solo 401(k)s must be established by an employer company. Unlike IRAs, where any individual may establish an account, a 401(k) may only be established by a company and is a benefit for its employees. For example, a solo 401(k) for a self-employed real estate agent with no other employees is created for the real estate agent who is the sole employee/owner. For many self-employed persons who have no other employees, this type of 401(k) is an excellent retirement plan too.

Unfortunately, the solo 401(k) is being oversold and over promoted to real estate investors who only own rentals. We have seen many promoters (operating out of a basement somewhere) who state that you can establish a solo 401(k) with your LLC that owns rental real estate. After all, they say, the LLC is a company and you are the only owner. Therefore this company can establish a solo 401(k). This is only partly true. The LLC that owns rental properties is not a proper entity in which to establish a solo 401(k) since the LLC receives “rental income” and since the owners of the LLC are not considered “employees” receiving wages or earned income that may be contributed to a retirement account. Rental income cannot be contributed to a retirement account and as a result the owner of the LLC is not an employee or person receiving earned income that qualifies to have a solo 401(k) account. All 401(k)s, solo 401(k)s included, must be established by a company for the benefit of its employees with wages or earned income. See IRS Publication 560. As a result, we recommend that clients use companies where there is wage income (e.g. s-corps) or self-employment income that creates earned income on schedule C  be used to establish a solo 401(k). While an LLC may be used to adopt a solo 401(k), that would only be the case if the LLC receives ordinary income for its owner that is then claimed on schedule C of the owner’s tax return.

3. Failing to File Form 5500-EZ – In general, 401(k)s are required to file a return called from 5500. Solo 401(k)s, however, have some exemptions to the 5500 filing requirement but there are many situations where a solo 401(k) is still required to file an annual form 5500-EZ return. The first instance where a 5500-EZ tax return is required is when the solo 401(k) has over $250,000 in assets. The second instance is when the plan is terminated. Regardless of assets, a form 5500 must still be filed at termination.

Our law firm has experience in creating solo 401(k)s that can be self-trustee’d and self-directed and we also assist our clients with annual maintenance, plan amendments, and required annual 5500-EZ filings. Contact us at the law firm to learn more information about our services.

How to Avoid the $15000 Solo 401(k) “Failure to File 5500-EZ” Penalty

by | Dec 8, 2014 | News

Do you have a solo 401(k)? Have you been filing form 5500-EZ each year for the 401(k)? Are you aware that there is a penalty up to $15,000 per year for failure to file? While many solo 401(k)s are exempt from the 5500-EZ filing requirement, we have run across many solo 401(k) owners who should have filed and who have failed to do so. If you have a solo 401(k) and have no idea what I’m talking about, stay calm, but read on.

One of the benefits of a solo 401(k) is the ease of administration and control because you can be the 401k trustee and administrator. However, as the 401(k) administrator and trustee it is your own responsibility to make the appropriate tax filings. This would include filing any required tax returns for the 401(k).  In general, there is no tax return to file for a self-directed solo 401(k).  However, one exception to this rule is if the plan assets exceed $250,000 at the end of the plan year, in which case, a tax return filing is required.  The return the 401(k) files is called a 5500-EZ.  Recently, more and more solo 401(k) owners have contacted us because they set up their solo 401(k) online or with some other company and they were never made aware that they are supposed to file a 5500-EZ when their plan assets exceed $250,000.  Some of these individuals have multiple years in which they should have filed the 5500-EZ but failed to do so.  The penalties for failing to file a 5500-EZ when it is required can be quite severe, with fees and penalties as high as $15,000 for each late return, plus interest.

Fortunately, the IRS has a temporary pilot program that provides automatic relief from IRS Late filing penalties on past due 5500-EZ filings.  This temporary program began on June 2, 2014, and will end on June 2, 2015. The IRS has yet to decide if they will continue with this program and make it permanent after June 2, 2015, but if they do, they plan to charge a filing fee.  Under this temporary program, there is no filing fee.

In order to qualify for this program, your solo 401(k) plan must not have received a CP 283 Notice for any past due 5500-EZ filings, and the only participants of your solo 401(k) plan can be you and your spouse, and your business partner(s) and their spouse.  This program is available to all solo 401(k) plans, regardless of whether it is a self-directed plan.

The IRS has provided a step-by-step process that can be found at http://www.irs.gov/Retirement-Plans/New-Penalty-Relief-Program-for-Form-5500-EZ-Late-Filers and at http://www.irs.gov/pub/irs-drop/rp-14-32.pdf.   In order to qualify and receive a waiver of penalties under the program, you must follow the program exactly.  Basically, you must do all of the following:

  1. File all delinquent returns using the IRS form in the year the filing was due.
  2. Write in red letters at the top of the first page of each filing, “Delinquent return submitted under Rev. Proc. 2014-32, Eligible for Penalty Relief”.
  3. Attach a one-page transmittal schedule to the front of each filing.
  4. Mail all documents to the IRS.

In sum, if you have a solo 401(k) plan that should have filed a 5500-EZ for years past because the plan assets exceeded $250,000 at the end of the plan year, then you should take advantage of this program, which will save you literally thousands of dollars in penalties and fees.  Under this program, the IRS must receive your past due to 5500-EZ filings before June 2, 2015.  If you have any questions about this program or would like assistance with submitting your late 5500-EZ filings under this program, please contact the law firm as we are assisting clients with current and past due 5500-EZ filings for their solo 401(K)s.