Solo-k Plans: The devil is in the details

There are a plethora (of piñatas and) Solo-k retirement plans in this nation. I find that about 50% of the time Solo-k’s I come in contact with are run beyond the boundaries of IRS regulations. That’s a nice way of saying they have issues.

The Pitch

Small Business owners with no employees who are looking for more ways to avoid taxes and save for their ‘maturing’ years will often look to a “solo-k” retirement plan. In essence, this is a 401k plan for companies that have only one employee (the owner and sometimes a partner or spouse).

Often a CPA or Financial Advisor will pitch these plans as a great way to put away extra money. Why?

  • Cost: Many investment companies and advisory firms offer very low-cost trust documents – think $150 to $200. So the barrier to entry is low.
  • Ongoing Cost: In most cases, until assets hit $250,000 no annual filing is due. So clients don’t need to hire an expensive TPA or recordkeeping firm. They can dump money in a brokerage account with no questions asked.
  • Simplicity: No one is watching. No reporting happens. It can all just fly fly fly and everyone involved can think/pretend it’s working perfectly. No one raises awkward questions.

The Reality

Just because no one tells you there is a problem, doesn’t mean you’re problem free.

I could recount countless stories (not sure that’s really possible) of conversations with business owners and financial advisors who have questions about the current solo-k plan, obviously not run by my shop. 99% of the time there is no TPA. There are no 5500 filings. There may be no thought.

When I chat with clients or advisors in these situations I ask some of the following questions:

  • Businesses: Does the owner or spouse own any portion of another business? Do they have minor children? Do those businesses have any other retirement plans?
  • Employees: Has the business ever had employees? Do they have employees now? How about leased employees?
  • Assets: What are the assets in the 401k plan? Does the spouse have a separate 401k plan for their business? What are the combined assets?
  • Filing: Has the plan ever been filed as 5500? If the solo-k terminated was a final filing done (even if assets were below $250,000)?
  • Documents: Who has been maintaining the documents? Have they been correctly restated and updated for required amendments?

The Outcome

When I walk through these questions there are typically two responses. First, I get ghosted, and that’s probably for the best (for you oldies that means they never call back). But second, sometimes I work through the issues with clients and help them get in compliance.

I also often hear in these conversations something similar to, “The IRS doesn’t audit these plans and there is no way they could know how things were run since no filings were done. So I’m just going to move on.”  (FYI – for any current people I may work with, I’m not talking about you. I’m talking about someone else.) While this sentiment may be debatable, as our colleagues at would be quick to remind me, I couldn’t comment on that and am legally prohibited from opining on the chances of an IRS audit/review. But in any case, I believe this line of thinking takes an advisor and client down the wrong track.

(This goes under “Things I’d sometimes like to say”)

If you are an advisor, do you want your clients to trust you? As an expert in the industry people come to you with the expectation that you’ll tell them what they need to know. Have you walked your clients through what’s happened and what the potential correction process looks like, and let them make their own informed decision?

If you are a business owner, have you found out what the cost of compliance is and weighed that in balance with your personal sense of honor? For myself, a good night’s sleep and knowing I’ve done my best is a priceless commodity – worth more than a couple of thousand dollars and a small “time” investment.

The Wrap Up

If you have a Solo-k or if you are a Financial Advisor on a Solo-k my free advice is to find a kindly TPA who will, on a yearly basis, ask you these questions concerning the retirement plan and advise you of possible consequences and options. Then, armed with the power of knowledge you can take the next steps as you see fit. But don’t stick your head in the sand.

Good luck.

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