Retirement Plan Deficiencies: A Look at the Most Common Mistakes – Part 4
Retirement Plan Deficiencies: A Look at the Most Common Mistakes – Part 4
Retirement plans must follow the laws and regulations established by the Internal Revenue Service (IRS) and Department of Labor (DOL) for the sponsoring employer to receive tax benefits and avoid penalties.
It can be difficult for plan administrators to be knowledgeable of the latest regulations and accurately interpret plan provisions in an ever-changing and highly-specialized regulatory environment.
To follow is WK’s fourth installment of the Top 10 areas in which our third-party administrators see the most common compliance mistakes made by employers.
#1- The Definition of Compensation
Click here for the definition and to read Part 1 of the series.
#2 – Eligibility
Click here for the definition and to read Part 2 of the series.
#3 – Late Contributions
Click here for the definition and to read Part 3 of the series.
#4 – Losing “Solo” 401(k) Status
A one-participant 401(k) plan is often marketed as a “Solo-401(k)”. You may be surprised to hear that this is not a special type of 401(k) plan; it is in fact the same as any other traditional 401(k) plan subject to the same laws and regulations. The Solo-401(k) gets its name because it is a plan designed for a business with no employees, where only the owner (and maybe the owner’s spouse) is an enrolled participant of the plan.
What is special about a Solo-401(k)?
A 401(k) plan with only the owner (or owner and spouse) participating does not have to file Form 5500 with the IRS for an active plan with assets under $250,000. Since there are no compliance testing or filing requirements (except for a final return after plan termination), it is inexpensive to sponsor, and the plan document is often provided and maintained by the investment company holding the plan’s assets with no third-party administration.
What can go wrong with a Solo-401(k)?
The Solo-401(k) works great for many business owners. However, if the business hires non-owner employees, additional IRS and Department of Labor (DOL) requirements may become applicable, and the need to offer the 401(k) to employees and to file the annual Form 5500 can easily be overlooked.
Are all employees automatically eligible to participate?
The plan document will specify when an employee becomes eligible for the 401(k) plan. Some plans require immediate eligibility when hired; other plans require a year of service (or even longer for certain long-term, part-time employees). Business owners with a Solo-401(k) should read their plan document carefully and inform their document provider if they plan to hire an employee.
What are the consequences of losing “Solo” 401(k) status?
If an employer fails to timely offer eligible employees the opportunity to enroll in the plan, the employer could be required to make up any “missed” contributions plus lost earnings for the employee. In addition, there are substantial IRS and DOL penalties for failing to timely file a Form 5500. If not corrected, the plan could be retroactively disqualified resulting in contributions and earnings becoming taxable and subject to interest and penalties for late payment – this includes 401(k) assets rolled into an Individual Retirement Account (IRA).
I have a Solo-401(k) and employees, what should I do?
Read your plan document and discuss with your document provider to determine if any of the employees met eligibility requirements. If you suspect your Solo-401(k) has been non-compliant, promptly seek advice from your tax advisor, an ERISA attorney, or a WK advisor.
If you need help interpreting IRS or DOL requirements for benefit plans, WK’s Employee Benefits Plan team provides a hands-on approach to plan administration and compliance monitoring with programs tailored to the individual needs of our clients. To learn more about the newest laws and regulations affecting your retirement plan, please contact a WK advisor.