What’s in a Solo 401(k) Plan document

If you’re not a tax specialist, we don’t blame you if the words “401(k) plan document” make you a bit nervous. 

Not only can these documents be long, but different providers will tell you that you need different things in them. If you are new to the subject, it’s enough to make your head spin.

Fortunately, you don’t need to be a tax specialist to read this article because we’re going to walk you through the basics of what a Solo 401(k) plan document is, how it works, and what you can expect in a plan document from SEPira(k).

What is a Solo 401(k) plan document?

In simplest terms, a plan document dictates what the owner of the Solo 401(k) plan can and cannot do with their plan. 

A plan document will specify if you are able to take out a loan for instance, if you can make Roth (post-tax) contributions, or if you can invest in alternative investments such as real estate or precious metals. 

Think of a plan document as the rule book for your Solo 401(k) plan. These documents can be quite lengthy (but not always, more on that later). No matter how long your plan document is, it is critical that you have a plan document that sets you up for success rather than finding out some disappointing news down the line.

Prototype documents vs non-prototype documents

Plan documents fall into two categories:

• Prototype plan documents

• Non-prototype plan documents

So what’s the difference? While these terms may sound confusing to some at first, they're quite simple in principle. 

Hearing “prototype” and “non-prototype”, you might be led to believe one is better than the other. Let’s set the record straight: all Solo 401(k) plan documents need to be approved by the IRS, so whether a plan document is a prototype plan document or a non-prototype plan document makes no difference. 

The key difference between them is that a prototype plan is a standard plan document that can be purchased and mass submitted whereas a non-prototype plan document is customized to one plan. Non-prototype plans typically have a higher cost, given that they are personalized to the individual and not standardized like prototype plans.

But remember, whether you have a prototype plan or a non-prototype plan they are all held to the same standards and approved by the IRS. One is not more valuable than the other. The value lies in how well-suited the plan document is to your needs as a solopreneur. 

Does every Solo 401(k) need a plan document?

Yes, like all 401(k) plans a Solo 401(k) plan must define its requirements and rules in a written plan document. 

Now, this plan document's format varies from provider to provider. 

Some plan documents can be 40-50 pages long, filled with provisions of all kinds (many of which do not apply and can be confusing). In contrast, the plan document SEPira(k) provides is only 8 pages long. This is because we only include what you actually need in your plan document, giving the solopreneur every advantage while limiting the minutia to sift through.

What goes into a Solo 401(k) plan document?

This is the somewhat tricky aspect of a Solo 401(k) plan document because what goes into it depends on the provider and where they originally acquired the plan document.

Some platforms will provide a document upwards of 40 pages long. SEPira(k) doesn’t, and there’s one good reason for it: we only provide you with what you need. A longer document does not necessarily mean you get more value or a better plan. More often than not these longer documents contain terminology and rules that are irrelevant to most solopreneurs. 

To make things simple, let’s break these components of the SEPira(k) plan document into distinct sections:

• Your company’s information

• Plan information

• Plan provisions

• Plan defaults

• Adoption agreement

We’ll walk through these step by step.

Your company’s information

The SEPira(k) plan document starts with a section for plan and company information which sets the plan type (EZ-K 401(k)) along with the information for your business:

• Your name

• Your EIN

• Your business structure

• A trustee/custodian

• Administrator information

Plan information

In this section, we detail where the plan came from, along with the effective date and amendments. 

Plan provisions

In the plan provisions section of the SEPira(k) plan document, you can elect for Roth Elective Deferrals and in-plan Roth rollovers. There are numerous benefits to making Roth contributions to your Solo 401(k) plan as these are made post-tax meaning that you will not be taxed when you withdraw. Learn more about how Roth contributions to a Solo 401(k) plan work. This is also where you can elect to allow for loans from your Solo 401(k) plan. Read more about the benefits of taking a loan from your Solo 401(k) and how they work 

IRS opinion letter

We also include an IRS opinion letter for the plan as well, which serves as confirmation that the plan is approved by the IRS. 

Plan defaults

The plan defaults are one of the areas that differentiate the plan document provided by SEPira(k) from other platforms. 

Recall from earlier, a longer plan document does not necessarily mean a more valuable plan document. If anything, it usually means more things to read through, sign, and need extra help and advice on as you set up your Solo 401(k). As a solopreneur, you have a lot on your plate. That’s why we try to make saving for retirement and setting up a Solo 401(k) as simple as possible. 

In the defaults section, we automatically set:

• The plan year (it’s set as the calendar year)

• The valuation date (designated as the last day of the plan year)

• Employee eligibility

• Permission for rollovers

• In-service distributions

• Permission for catch-up contributions if you are eligible

• Vesting rules

• The retirement age

• And more

Rather than provide page upon page to fill these individual items manually, SEPira(k) makes your plan document as simple as possible with these defaults specifically designed to support the solopreneur and micro business owner. 

Adoption agreement addendums

Lastly, we have the adoption agreement addendums. This is where you can make modifications to specific terms in the default should you need them for your plan.

Who creates the plan document?

Like many Solo 401(k) providers, we purchased our plan document and make it available to the users of the SEPira(k) platform. SEPira(k) purchases their plan document from Penserv, a leader in retirement benefits and services.

What makes the SEPira(k) plan document special?

So what makes the document that SEPira(k) uses special? Simple; it’s streamlined for the solopreneur

A 40+ page plan may seem comprehensive, but if your plan is approved by the IRS then whether it is 8 pages or 48 does not make it any more compliant. In fact, many longer documents will contain language or stipulations that don’t apply to the use case of a solopreneur (which we exclude). These provisions, if not completed correctly, may trip you up if not followed correctly

For example, a Solo 401(k) plan is top-heavy by default. This means that the owners and key employees of a company own more than 60% of the plan assets. You would want that because you’re the owner, but a top-heavy plan carries extra rules from the IRS (a rule under section 416 of the code that refers to handing rank-and-file employee contributions). Now, this language does not apply to the Solo 401(k) use case because you don’t have rank-and-file employees, but this will be included by default in many other 401(k) plan documents. 

At SEPira(k), we understand the needs of solopreneurs and micro business owners and we take that knowledge and care into the plan document that we make available to you. 

Ready to unlock serious (and simplified) savings with a Solo 401(k)?

If you made it this far, then trust us that this is the hardest part of opening a Solo 401(k) plan with SEPira(k).

With SEPira(k), not only do you get a simpler plan document that you can actually understand, but we also give you many more investment options than the big providers will. That’s because SEPira(k) provides a self-directed Solo 401(k) record-keeping platform, which means you can invest in stocks and bonds like the others, as well as real estate, tax liens, and a host of other alternative investments. 

Simple to understand, yet incredibly robust - that’s the Solo 401(k) you’ll get with SEPira(k).

You can create an account and set things up in minutes. To start taking advantage of all the benefits a Solo 401(k) provides (while letting us do the heavy lifting for you) click the link below to create an account today.

Create your account and start saving today.