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Don't Miss Out On Your Solo-K

By Jerry Kalish

I’ve written about The Wonderful Solo-K before. It’s a special type of retirement plan also called Solo 401(k) and Individual 401(k). But by whatever name you call it, it provides 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.

401(k) plans were introduced in 1978, but it took a tax change starting in 2002 to allow business owners to contribute substantially more than they would with IRAs, SIMPLEs, and SEPs. Those 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.

Now, practically every major financial service company--insurance companies, brokerage firms, mutual funds--offers a low-cost Solo 401(k) plan. So far so good.

But there’s a flashing yellow compliance light. And accompanying it, there's a legal unfairness for the self-employed or small business owner.

A Solo-K, 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, even if the business owner (and spouse) are the only participants.

Sometimes that requirement gets lost in translation, and a self-employed or small business owner whose plan exceeds that threshold fails to 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.

Form 5500-EZ is due no later than seven months after the end of the plan year, unless extended 2 ½ additional months. So, for calendar-year plans, the 2008 return is due no later than July 31, 2009 unless extended to October 15, 2009.

If not filed on time, substantial penalties can be assessed by the Department of Labor, which oversees Form 5500 delinquent filings--up to $15,000 penalty for each delinquent year.

Now for that unfairness I was talking about.

The DOL does have a Delinquent Filer Voluntary Compliance program, which caps penalties at $750 for one delinquent Form 5500 and $1,500 for more than one year, no matter how many years are involved. And many employers take advantage of the DFVC program. However, business owners who have not timely filed a required Form 5500-EZ are not eligible for the DFVC and could potentially be subjected to large penalties.

Doesn’t sound fair, does it? It isn’t. But until the law or the regulations are changed, check this out with your tax advisor before July 31 if you have a calendar-year plan.

Jerry Kalish is founder and President of National Benefit Services, Inc., a Chicago-based employee benefit consulting and administrative firm that serves private-held companies, publicly traded companies, and public sector employers. He blogs at The Retirement Plan Blog and can be reached at jerry@nationalbenefit.com.

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