For small business owners, retirement planning often brings up a lot of questions, especially for those who have set up an owner-only or solo 401(k) plan. While these plans offer unique advantages, there are specific filing requirements and compliance rules that must be met to maintain their benefits. Missteps in filing can lead to penalties, and administrative oversight can be time-consuming and complex. This is why many business owners in Phoenix, Scottsdale, and beyond choose to work with a Third-Party Administrator (TPA) to ensure their 401(k) plan administration stays on track.
In this article, we’ll break down the filing requirements of an owner-only 401(k) plan and explore the significant role a TPA can play in ensuring plan compliance and simplifying your 401(k) experience.
Understanding the Filing Requirements for an Owner-Only 401(k) Plan
An owner-only 401(k), also known as a solo 401(k), is a retirement plan tailored for self-employed individuals or business owners without full-time employees (other than a spouse). While it offers tax advantages and generous contribution limits, it also requires specific IRS and Department of Labor (DOL) filings to maintain its compliance status.
IRS Filing Requirements for Owner-Only 401(k) Plans
For owner-only 401(k) plans, filing requirements hinge primarily on the plan’s asset value. Here are the filing thresholds to be aware of:
- Form 5500-EZ: If your plan assets exceed $250,000 as of December 31 of any given year, you’re required to file Form 5500-EZ with the IRS. This form is an annual report detailing the plan’s financial information, operations, and compliance status. Even if you’re the only participant, meeting this requirement is essential to avoid penalties.
- Final Form 5500-EZ Filing: If you decide to terminate your owner-only 401(k) plan, you’re required to file a final Form 5500-EZ, regardless of the plan’s asset value. This ensures that the IRS recognizes the termination, and your filing obligations officially conclude.
Penalties for Non-Compliance
Filing Form 5500-EZ late or neglecting to file it altogether can lead to significant IRS penalties. Fines can range from $25 per day up to a maximum of $15,000 per form per year. For small business owners, these penalties can quickly add up, eating into retirement savings. Ensuring timely filing and accurate reporting is critical to avoid these financial setbacks.
Why Owner-Only 401(k) Plans Still Need Compliance Management
Even though an owner-only 401(k) plan is simpler than a traditional 401(k), there are still several areas where compliance is required, including:
- Contribution Limits: The IRS sets annual contribution limits for solo 401(k) plans, including both employee salary deferrals and employer contributions. Staying within these limits is crucial, as over-contributions can lead to costly penalties and additional tax burdens.
- Non-Discrimination Testing: Though non-discrimination testing typically applies to plans with multiple employees, understanding this aspect is still essential for owner-only plans that may one day expand to include employees. In this case, understanding the transition from an owner-only to a more comprehensive plan can prevent future compliance headaches.
- Required Minimum Distributions (RMDs): For owners over the age of 73, Required Minimum Distributions (RMDs) must be taken from the 401(k) plan each year. Failure to do so can lead to excise taxes on the portion of the RMD that was not distributed.
The Role of a TPA in Owner-Only 401(k) Plan Administration
Hiring a 401(k) plan TPA (Third-Party Administrator) can be invaluable, even for an owner-only 401(k) plan. TPAs are experts in 401(k) plan administration and compliance, offering services that help you avoid costly mistakes and reduce administrative burdens. Here’s how they help:
Ensuring Accurate 401(k) Plan Compliance
A TPA can be instrumental in ensuring that all 401(k) plan filing requirements are met accurately and on time. They keep track of filing deadlines and prepare required documentation, making sure everything is filed with the IRS and DOL correctly.
For solo 401(k) plans, the primary filing task is Form 5500-EZ. TPAs help by:
- Filling Out Form 5500-EZ: They can prepare and file Form 5500-EZ for you, ensuring accurate reporting of plan assets and compliance with federal requirements.
- Managing RMDs: If you’re 73 or older, a TPA can track RMD deadlines and amounts, helping you avoid penalties.
- Supporting Transition to a Traditional 401(k): If you hire employees and need to transition to a traditional 401(k), a TPA can guide you through the necessary adjustments, ensuring you meet all regulatory requirements.
Monitoring Contribution Limits and Adjustments
Solo 401(k) plans offer generous contribution limits, but calculating these contributions accurately is essential. A TPA can help ensure your contributions do not exceed IRS limits, protecting you from penalties and keeping your plan compliant.
For owner-only plans, a TPA will:
- Track Annual Contribution Limits: They keep tabs on IRS contribution limits each year, calculating how much you can contribute as both employer and employee.
- Adjust Contributions Based on Revenue: Since many business owners’ earnings vary, a TPA can help adjust contributions accordingly to match your financial status.
Avoiding Costly Penalties and Errors
Without professional assistance, errors in 401(k) plan administration can occur, leading to fines and penalties. TPAs provide a level of oversight that prevents mistakes, giving you peace of mind knowing that your plan is being managed correctly.
They can help you avoid:
- Form 5500 Penalties: A TPA ensures your Form 5500-EZ is filed accurately and on time, preventing late filing penalties.
- Excess Contribution Penalties: By monitoring your contributions closely, a TPA can prevent over-contributions and the associated penalties.
- RMD Errors: A TPA will track and calculate RMDs accurately, ensuring you meet IRS distribution requirements without penalties.
Facilitating Plan Termination
If you decide to terminate your solo 401(k) plan, a TPA can handle the necessary filings and termination requirements. This includes submitting the final Form 5500-EZ and ensuring your plan is terminated in compliance with IRS and DOL guidelines.
Terminating a retirement plan without completing the proper filings can lead to future IRS inquiries or even penalties, so having a TPA assist in this process helps ensure a clean and compliant termination.
Benefits of a TPA for Owner-Only 401(k) Plans in Phoenix and Scottsdale
Many small business owners in Phoenix and Scottsdale choose to work with TPAs due to the peace of mind and compliance expertise they bring. By working with a local TPA, you benefit from their knowledge of regional and federal retirement plan laws and regulations, ensuring that your 401(k) plan administration meets all 401(k) plan compliance standards specific to Arizona.
A TPA can also offer additional support tailored to your business location, such as:
- Personalized Guidance: TPAs in Phoenix and Scottsdale understand the unique retirement planning challenges of small business owners in these regions and can provide customized solutions.
- Local Regulations: While 401(k) plans are federally regulated, some states have specific tax rules or considerations that impact retirement planning. A TPA with local expertise can guide you through these nuances.
- Community Connections: Local TPAs often have connections with other financial, tax, and legal professionals in Phoenix and Scottsdale, enabling you to build a network of experts for all aspects of your retirement planning.
Making the Choice to Hire a TPA for Your Owner-Only 401(k) Plan
Even if your owner-only 401(k) plan is a relatively straightforward setup, the compliance requirements can be complex, and the cost of errors is high. A TPA provides the oversight needed to meet these requirements, handle all filings, and keep your retirement plan compliant, minimizing the risk of penalties and saving you time.
By hiring a TPA to manage your 401(k) plan compliance and administration, you can focus on what you do best—running and growing your business—while feeling confident that your retirement plan is in expert hands. TPAs can ensure that your 401(k) plan filing requirements are met, provide ongoing guidance, and adapt your plan to fit your evolving business needs, whether in Phoenix, Scottsdale, or beyond.
Whether you are just starting with an owner-only 401(k) plan or looking to improve your plan’s compliance and administrative efficiency, working with a TPA can be one of the smartest investments you make for your retirement planning. The cost of compliance errors far outweighs the benefits of professional assistance, making a TPA a valuable partner in securing your financial future.
Need Pension Consulting & Pension Plans in Phoenix, AZ?
Fiduciary Advisors, Ltd. is a business-to-business associated pension administrator based in Phoenix, Arizona, since 1990. We specialize in designing and planning employee retirement programs, pensions, profit sharing, and are third-party administrators for 401K for small- to medium-size businesses. We conduct enrollment meetings, prepare detailed actuarial calculations, cash-balance plans, and financial consultation for all businesses. Give us a call today for more information!