a. Example: Dave owns ABC Company that has only two employees, Dave and his wife, Sue. However, Sue owns a consulting firm, XYZ Company that has 5 employees. If Dave establishes a 401(k) for ABC Company, the plan must also include the employees of XYZ Company since the two entities comprise a “controlled group” through family attribution. In other words, Dave can not establish a ‘Solo‐K” for just him and his wife; the plan must cover all employees within the “controlled group”.
2. Failing to file Form 5500. Solo‐Ks that cover only the owner and his or her spouse are not covered by Title 1 of ERISA and are not required to file Form 5500 so long as the plan’s assets are under $250,000. However, an annual Form 5500 must be filed for any plan year where the assets exceed $250,000 or the plan covers someone other than the owner and spouse.
a. Example. John and his wife Sarah own a real estate company and sponsor a Solo‐K. Since the Solo‐K has assets in it totaling only $100,000, John has not been filing Form 5500. However, during the summer of 2013 John decides to employ his son, John Jr., to help with some mailings. If the eligibility requirements found in John’s Solo‐K Plan Document allow for immediate entry into the plan, (as most do) John Jr. will become eligible for the Solo‐K upon his date of hire. If so, starting with the 2013 plan year, it must file Form 5500 regardless of the amount of assets in the plan since the Solo‐K covers someone other than an owner and the owner’s spouse.
i. Solution: The eligibility provisions in a Solo‐K Plan Document can delay an employee’s entry into the plan until the January 1 or July 1 following the later of 1 year of service (see #4 below) or the attainment of age 21. Having such an eligibility provision is recommended since it may keep some part‐time employees from entering the Solo‐K and delay the entry date of others.
3. Failing to comply with 401(k) nondiscrimination provisions
. Solo‐Ks are not given a free pass on the annual 401(k) nondiscrimination test called the Average Deferral Percentage (ADP) test. So long as the Solo‐K covers only the owner and spouse, the ADP test is a moot point. However, once the Solo‐ K covers non‐highly compensated employee(s), the annual ADP test must be run unless the 401(k) plan has elected and complied with Safe Harbor status.
4. Failing to keep the plan document language current
. Since ERISA was passed by Congress in 1974 there have been over 5,000 changes to this retirement law. The plan documents for all qualified retirement plans, including Solo‐Ks, must be periodically amended to reflect these law changes or face potential plan disqualification.
5. Solo-K investments that are prohibited
. Using Solo‐K plan assets to invest in the owner’s vacation home, art work or other collectibles, gold or silver
bullion, or loans back to the business are examples of investments that are prohibited and would be subject to IRS penalty and excise tax.