Solo 401(k) Record Keeping Best Practices You Need To Know

Every adult of tax paying age knows how picky the IRS can be. They have a way they want records to be given to them and will not hesitate to make things complicated if they are not done correctly. Therefore, it’s a good idea to keep up on good recordkeeping practices, especially when it comes to a Solo 401(k) plan.

Here are some of the best recordkeeping practices regarding Solo 401(k) plans that small business owners should be aware of:

• The current best practice for recordkeeping is using excel spreadsheets.

• The source of all money needs to be kept track of separately.

• Hiring a 3rd party admin typically comes with high costs.

• Disqualification of the plan can occur by not running the plan according to the plan document.

Keep reading for an in-depth look at all of these practices, as well as some additional useful information regarding requirements and disqualifications, approved investments, and of a recordkeeping service that will help ensure the plan doesn’t become disqualified.

Current Best Practice Uses Excel Spreadsheets

It sounds like it shouldn’t be this way, but the current best practice for Solo 401(k) recordkeeping for self-directed providers is Excel spreadsheets. These detailed sheets tell the IRS where the money is coming from and where it is going and might as well use something that works well that is also easily accessible.

Most providers have spreadsheets that they give to their clients to manage. This tends to be exceptionally stressful, as the point of hiring someone to record keep is to cut down on the likelihood of doing it wrong. If something does manage to go wrong with the sheet, the IRS will happily suggest the IRS Correction program under the EPCRS (Employee Plans Compliance Resolution System) program. If errors are not corrected it may mean disqualification of  the entire plan which could mean  a massive tax bill.

Money Sources Need to be Kept Separate

All money sources need to be kept separate when record keeping for a Solo 401(k). The reason being each contribution source has its own set of rules associated with it including, limits, timing of distribution and taxation.  Lumping everything under one such as pre-tax and post-tax is just not going to cut it.. Every single thing needs to be listed out accurately so that they can track where the money is coming from and where it is going.

This can usually be done pretty simply, but can also get rather detailed and complicated. Working with an expert can help make sure that everything is best suited for you and your individual needs.

Third-Party Administration has Fees

Most small businesses do not keep their own records. Instead, they hire out a third-party administrator to do it for them. This is great on one hand as the business owner doesn’t have to know how to do everything perfectly themselves. On the other hand, it comes with fees. Keep in mind however, farming out the ministerial duties of an employer to a third party does not relinquish the employer’s role as a fiduciary of the plan.  

Ultimately it’s always the employer who’s responsible for the plan.  Depending on the administrator, these can be rather pricey! It’s not just hiring an employee to balance checkbooks; a lot goes into it. Some services even have a bunch of extra fees which will increase the cost.

Some small businesses try to cut corners and that’s when things start to become problematic. Finding a provider or service with low fees yet quality work can be a pain, but thankfully SEPira(k) is an option.

Reporting Requirements

There is a strong likelihood that an annual report on the Solo 401(k) plan will need to be filed. It needs to be done by the last day of the seventh month after the plan year ends, so typically by the end of July for the previous year.. This is the IRS Form 5500-EZ if the plan’s balance has reached the threshold of $250,000. Failure to file this form timely has hefty penalties associated with it 

Typically, Solo 401(k) plans use Form 5500-EZ as they are one-participant plans. However, filing may not be required if the total assets do not exceed $250,000 USD by the end of the plan year unless it is the year the plan is terminated.

Plan Disqualifications

Small missteps can lead to big problems. The IRS is extremely particular about how things are done.  Failure to understand the plan document and its rules may mean the employer not be operating the plan properly. Plan operational failures not corrected timely may expose the plan to the possibility of plan disqualification.  

This means that the plan loses it qualified status which means the plan becomes taxable.  Other issues such as prohibited transactions can cause penalties associated with the amount associated with the prohibited transaction and if not corrected timely can cause the amount to be fully taxable.   

Prohibited Transactions

Partaking in prohibited transactions won’t necessarily disqualify the entire Solo 401(k) plan but will disqualify portions of it. The disqualified person who partakes in a prohibited transaction will be required to pay an initial 15% tax within a correctional period. If it isn’t corrected then, an additional 100% tax will be imposed.

This correction period is the tax period plus 90 days after the day a notice of deficiency is mailed from the IRS. It involves undoing everything related as much as possible while not putting the plan in a worse situation than had it been done properly.

According to the IRS Publication 520, prohibited transactions include:

• Transferring income or assets to a disqualified person

• Use of assets by or for a disqualified person

• Selling, exchanging, or leasing property to a disqualified person

• Lending money or extending credit to a disqualified person

• Furnishing goods, services, or facilities to a disqualified person

• Dealing with plan income or assets in fiduciary interest

• Receiving a receipt of consideration by a fiduciary for their account in a transaction that uses plan income or assets

There is an exemption for disqualified persons who are actually entitled to the plan, such as an owner’s spouse. Be sure to check with an expert and to perform all transactions correctly in order to avoid these taxes, undoing everything, and generally wasting time.

Operational Failure

Taking money out of a Solo 401(k) plan when you do not meet any of the plan requirements will end up disqualifying the entire plan.  This is an example of an operational failure.  Failures such as this can be corrected through one of the methods under the Employee Plan Compliance Resolution System.  Here is also a link to common errors the IRS has outlined with instructions on how to correct such errors. If a plan’s error cannot be found on the list the employer may need to go through the IRS Voluntary Compliance Program, which could be costly and opens the plan for IRS scrutiny. The moral of the story is to run the plan in compliance or get assistance from competent advisors.

  Additional Disqualifications

As mentioned previously, the IRS supplies a fix-it guide for common 401(k) mistakes and how to find, fix, and avoid the mistakes. It is a guide for all 401(k) plans, with numerous points being improperly managing employees within the plan. 

As a Solo 401(k) does not allow for full-time rank-and-file employees, chances are that these are not going to be applicable. However, there may be some employees with an impact on the plan despite not being full-time rank-and-file. Check with an expert regarding them should this be applicable.

Here are a few of the additional disqualifications supplied on the IRS 401(k) fix-it guide:

• Plan document has not been updated recently enough to reflect changes made to laws

• Plan terms were not followed

• Deferrals and allocations were not correctly used

• Excessive deferrals were not distributed or limited to the amounts under Section 402(g)

• Non-conforming participant loans or prohibited transactions

• Improperly made hardship distributions

• Required minimums not made to a top-heavy plan

• Form 5500-EZ was not filed for accounts holding more than $250,000

Additionally, they supply plan overviews and checklists, documentation on the correctional program, and additional resources underneath the supplied chart.

Avoiding Disqualifications

The simplest way to avoid disqualification of a Solo 401(k) plan is to just do everything correctly the first time. Nobody is perfect, but they can use the tools they have available to come pretty close. This can be getting a quality provider or recordkeeping service in your corner, or being extremely meticulous if you happen to be qualified and experienced in these sorts of plans.

Here are some of the suggestions the IRS supplies in order to avoid some of the most common mistakes with 401(k) plans in general:

• Mark when amendments need to be completed on a calendar, planner, or another tool

• and retain the record with easy access in the event of an IRS audit

• Review plan documentation annually

• Maintain regular contact with your provider

• Communicate accurately and timely with all relevant parties

• Perform an annual review

• Record accurately

• Monitor all information

• Apply all participation requirements

• Set up procedures to ensure all deposits/deferrals/distributions are made as soon as possible

• Review every participant loan in whole to ensure that there are no prohibited procedures and transactions

• Always understand when and how things are filed

• Check to ensure that everything was properly filed; don’t just assume that it was done

For the most part, this just means to do your due diligence. Working with a quality recordkeeping service can help ensure that this due diligence is done and everything is going according to plan. It might cost a bit more, but it is definitely worth it.

Returning a Plan to Compliance

Accidents happen and laws change. If a Solo 401(k) plan falls out of compliance, there is a program in place to help undo the problems and fix the plan. This is the Employee Plans Compliance Resolution System (EPCRS) and is used before a plan is disqualified in order to avoid that. However, this is exceptionally pricy, running around $500 at the time of application.

There are three ways that mistakes can be corrected according to the EPCRS documentation:

• Self-Correction Program (SCP)

• Voluntary Correction Program (VCP)

• Audit Closing Agreement Program (Audit CAP)

Hopefully this program will not be needed ever, but it is a relief to know that it exists just in case.

Common Investments

There are a number of approved investments that can be made with a Solo 401(k) plan as long as they are done so properly. Many providers supply a plan or package that their clients can then select from, while others allow just about anything. A Solo 401(k) is a self-directed plan for self-employed individuals after all, but some people want more structure and fewer options than others.

Nothing is necessarily better or worse than another option on its own but can be depending on personal circumstances. Be sure to always discuss with an expert before making decisions to ensure that they will help rather than hinder your saving goals.

Traditional Investments

Traditional investments are the normal investment options that basically everyone provides. For the most part they are pretty safe options, but they can be variable especially if getting extremely particular.

Here are the traditional investment options available:

• Annuities

• Bonds

• CDs

• EFTs

• Money Market

• Stocks

Of course, the current market will determine what exactly is available and which might be a better option. It’s a good idea to be flexible with particulars and to discuss these options regularly.

Alternative Investments

Alternative investments vary in risk and popularity. These are the sorts of things that providers may or may not have included in a plan somewhere or as options to select from. It’s also important to note that some of these options have additional filings and tax such as  unrelated business income, though most follow regular plan taxation. These investments include real estate, secured and unsecured notes, tax liens, private placements, mortgage deeds and others. 

Residential Real Estate

Residential real estate is anything that is meant for someone to live in, such as a house, condo, or duplex. The whole building does not count as residential, only their individual units.

Some residential real estate options that are available include:

• Bank-owned and REO

• Developed and undeveloped land

• Flips

• Foreclosures

• Public probate

• Rental units

• Those subject to an existing mortgage

There are some other options available as far as residential real estate goes, but these cover the broadest sections.

Commercial Real Estate

Commercial real estate, unlike residential, is meant to be used in business. This can be a whole building, their parking lots, or certain types of land.

Here are some commercial real estate options:

• Airplane hangars

• Apartment/Condo/Townhouse buildings

• Commercial REIT’s

• Farmland

• Hotels and resorts

• Mobile home/RV parks

• Offices

• Parking garages (public and private) and private parking lots

• Recreational

• Retirement homes/assisted living facilities

• Storage

• Warehouses and Shipping/Distribution centers and yards

Basically, if a parcel is meant to turn a profit or to be used in the act of doing so, it probably counts as being commercial real estate.

Loans and Financing

Outside of real estate, there are other options for unconventional investment opportunities. Loans and financing options are rather popular investments made in Solo 401(k) plans.

Here are various loans and financing options:

• Auto finance loans

• Construction loans

• Equipment financing and rentals

• Equity participation loans

• Furniture rentals

• Micro loans

• Mortgages

• Performing and non-performing notes

• Personal loans

• Private stocks

• Vacation entertainment rentals

Some of these can end up rather tricky and can disqualify the plan if you are not careful, so definitely speak with an expert to ensure these options are done properly.

Business

If you have a Solo 401(k) then you know about business. That makes business investments enticing, and thankfully, they can be invested in with your Solo 401(k) plan.

These are some of the business investment opportunities:

• C Corporations

• Corporate debt

• Delivery vehicles

• Food trucks

• Hedge funds

• Joint ventures

• Limited Liability Companies (LLCs)

• Limited Partnerships

• Venture capital

Do note again though that these sorts of investments can trigger additional taxes and need to be managed meticulously or the plan risks disqualification.

Additional Alternative Investments

If all the aforementioned investments still weren’t enough to choose from, there are still more options available. Some of these are extremely volatile, while others are relatively safe.

Here are further unconventional investment options:

• Account claims and accounts receivable

• Blockchain

• Cryptocurrencies

• Foreign currency

• IPOs

• Mining rights

• Movie and theater productions

• Oil, gas, and royalty interests

• Precious metals

• Private placements

As the world moves on, more and more unconventional investments will become available. Try not to jump on the newest bandwagon all the time, but it doesn’t hurt to at least consider it from time to time. Just keep good records, have an expert in your corner, and keep a close eye on them and things should be okay.

Unrelated Business Income Tax

While there are many approved investments that can be done with a Solo 401(k), some may still trigger an Unrelated Business Income Tax (UBIT) for investments that generate Trade or Business income. Be sure to always review everything before selecting investments and/or assets, speak with an expert, and determine if these sorts of investments are worth it for you and your overall goals.

Advantages to Using SEPira(k) for Recordkeeping

As has been made clear thus far, recordkeeping for a Solo 401(k) can be rough. While other providers leave most of the work to their clients and riddle them with fees, SEPira(k) is something else. They make recordkeeping simple, allow for a lot of self-direction from the client with customized plans to suit them and their needs, and they do more of the work so their clients can spend their time doing other things.

Wide Range of Investment Opportunities

Although SEPira(k) does not offer any investments their state of the art platform can record keep a solid range of investment opportunities which can be record kept in the platform. From traditional to alternative, they can help you invest in the way you want it.

Here are just a few of the Solo 401(k) investment opportunities that clients can hold under their SPira(k) Solo(k):

• Bonds

• Energy Investments

• Equipment Leasing

• Foreign Currency

• Mutual Funds

• Precious Metals

• Private Placements

• Real Estate

• Stocks

• Tax Liens

Since its a open architecture platform, which leaves the types of investment for the plan to the Trustee,  they are open to other opportunities. 

Streamlined Recordkeeping

SEPira(k) has a state-of-the-art platform for recordkeeping that helps to streamline and simplify the process. This helps their clients manage their assets and get help from experts that are knowledgeable with retirement plan rules,rather than just going through FAQ pages and hoping for the best.  The information can also be made available to other advisors to help assist the employer for tax, legal or investment questions. 

This platform is also extremely secure and has a robust backup system to ensure that their clients’ money stays safe at all times. When documents are ready, they are also stored on your account so it’s easier to keep and find them all in one secure location.

Expert Guidance

If their platform wasn’t enough, SEPira(k) also has a team of retirement plan and technology experts that are there to help give personalized support to all of their clients. Not everyone fits into boxes in an FAQ page or in a neat little premade bundle of plans, and they know it. That gives more room for their clients to really customize and self-direct their retirement while knowing they have the best resources and people to help them do it right.

Simple Plan Establishment

Establishing a plan is simple and does not take much time to do. Their platform will walk you through line-by-line to help you prepare a proper document and uses a lot of the same information when setting up in different areas, so things don’t need to be complicated. Along with setting up the plan documents required, the same information is used to establish a checking account for the plan. This makes the process easier for plan operations instead of having to shop around from bank to bank to set up a checking account for the plan.

Other Advantages

SEPira(k) doesn’t stop at the aforementioned benefits. They have plenty of other advantages to using their service from low costs and no hidden fees, all the way down to providing guidance on Solo 401(k) operations . They have all the essentials needed to keep the plan in compliance with the IRS.,Chances are though that nothing will go wrong, as they have proper, detailed record keeping that goes beyond just having simple plan documentation. Couple all that with everything above and they really are an incredible asset to have while you save for retirement.

Conclusion

The IRS can get really picky. Sometimes that makes things easy, like when they say exactly what they are looking for. Other times, they make things really complicated as they explain in lots of jargon the common person is not going to understand well. 

When it comes to Solo 401(k) plans, they have only a few requirements to be able to open one of these plans, but there are also many ways in which things can go wrong. If they do,there are ways to correct errors to avoid unintended consequences such as plan disqualification..

In order to fix this, they do have options available. However, they tend to be rather pricey and have a time limit to them. Otherwise, they will add even more taxes! Thankfully, there are recordkeeping services such as SEPira(k) that are available to ensure the Solo 401(k) is maintained in compliance and properly maintains records in a streamlined way with their state-of-the-art secure platform and expert guidance.