Solo-K - Trustee Responsibilities
A Solo-K plan is a wonderful retirement plan for the self-employed individual. While generally easy to administer, as Trustee, you do have responsibilities not only to the plan but also to the IRS. Listed below are some administration responsibilities of the plan's Trustee (most likely you, the business owner) in making sure you accurately administer the plan but also comply with any IRS requirements for the plan.
Plan Document Sponsor
You will be retaining the services of a plan document sponsor (e.g., PGI SelfDirected, LLC) for the creation, registration and maintenance of your Solo-K plan documents. As part of this relationship, you will want to ensure you understand the Solo-K plan process and structure. Remember, this is your Solo-K plan that you must correctly administer. Knowing the ebbs and flows related to this process and your responsibilities are key.
You will also want to confirm from the plan document sponsor that they will update the plan as necessary, and needed. Make sure you ask them about their re-statement process. This is an IRS-required process that must be completed every 6 years (next one being in 2020-21) to re-state the plan documents. Some companies charge extra for re-statement, while others (including PGI) include this as part of the annual plan document maintenance fee.
Correct Account Establishment
Keeping in line with the "this is your plan" notion, this is an important consideration. Some plan document sponsors will simply suggest to "open a bank account and you can start making your contributions into the business banking account for the Solo-K plan."
Simply stated...I disagree with this advice. Why?
To start, there are different types of contributions (e.g., elective deferrals (pre-tax and Roth), employer match/profit sharing, after-tax contributions, and rollover contributions) that can be made to the plan and each sub-account should have its own account.
Along with these different types of contributions, there are different IRS rules that can and do affect when and how you can take distributions from the plan. As an example, rollover contributions can be rolled back out of the plan at any time, but elective deferrals cannot be until: 1) the plan is terminated and assets need to be moved, or 2) you are over the age of 59 1/2. This is general information as there can be exceptions. But, emphasis should be made on keeping very accurate records of the different types of contributory funds within the plan. And, Roth contributions, rollovers or conversions must be kept separate and segregated from other, pre-tax funds.
While this is your plan and, ultimately, your decision, I recommend that we establish the plan with contributory sub-accounts for the plan that you are or most likely going to utilize. While the Solo-K has access to all of the funds for investment purposes, they are segregated within the plan so you can account for which funds you used.
PGI can give you suggestions on the simplest way to manage this structure.
Accounting for Investments
Whether the funds you use for the investment are Roth, pre-tax, profit sharing, etc., proper bookkeeping is strongly suggested. This could include any "house cleaning" activities associated with the record-keeping for an investment, including what funds were used.
I also emphasize the more record-keeping you can do the better. A good visual: if your plan was ever audited, could you easily and correctly present to the auditor every aspect of the plan's operation?
Reporting Rollovers into the Solo-K
Many individuals rollover funds from other plans into the Solo-K as an immediate source of investment capital. While you can certainly rollover most plan funds (e.g., a Roth IRA cannot be rolled over into a 401(k)), the rollover(s) must be correctly accounted for when you file your 1040 tax return for the year in which the rollover occurred.
Failure to account for this rollover correctly would incur the IRS sending you a letter stating that you owe them penalties and interest (as they do not know if you rolled over the funds or kept the funds or both). If you did not report the non-taxable rollover, they will automatically send you a letter of inquiry.
Please review Reporting Rollovers INTO your Solo-K.
IRS Form 5500-EZ
Let's start this section off by telling you the only times you need to submit this to the IRS:
- Fair Market Value (FMV) of the Solo-K -- IF the fair market value (FMV) of the assets in your plan reach $250,000; and/or,
- Plan Termination -- At the time you terminate your self-employed business activities, the IRS will expect you to terminate the 401(k) plan as soon as is administratively feasible. You would then move these assets to another plan. If still wanting to self-direct, you would rollover the assets to an SDIRA. As part of this process, you would terminate the plan and file a final 5500-EZ reporting the termination of the plan and the disposition of the assets from the plan.
