As I have said before, there comes a time for most where it is time to give your solo-k (also referred to as a self-directed 401(k), self-administered 401(k), uni-k, or individual 401(k) plan) a proper send-off. In simple terms, how does one go about terminating your self-administered Solo-K plan.
For many, a Solo-K plan is almost like a human life. There is a birth (creation of the plan), life (the operation of the plan) and the death (terminating a Solo-K plan). We all know the concept of birth and life, but at some point in time for most individuals, the plan will be terminated at some point in time. For most, your business which sponsors the plan will be discontinue its operations and, as such, the plan must be terminated as there is no longer a business that would be sponsoring the plan.
Terminating Your Self-Administered Solo-K Plan
Okay, so the warning of when you might need to be terminating a Solo-K plan has been delivered, but how do you go about doing this and what things should you keep in mind:
- Consult with Your Tax Professional — For those who know me, you won’t be surprised with this recommendation. Your tax professional should always be included “in the loop” as they are in the best position to provide you tax guidance.
- Inform Your Plan Document Sponsor of Your Intention to Terminate — In most cases, the plan document sponsor (e.g., PGI Agency) for your Solo-K is not a TPA (Third Party Administrator) for your plan. In simple terms, you, as Trustee, operate your plan with no TPA assistance. You are responsible for all IRS and DOL regulations pertaining to the operation of your plan. As such, you need to notify your PDS of your intentions to terminate. The PDS will/can provide the Trustee with termination paperwork for your files, it is the professional thing to do on your part as Trustee, and, hey, it may actually save you the hassle if your PDS bills you for an annual fee (because the PDS still assumes you are operating your plan).
- 1099-R Completion Showing Distribution from the Plan (First IRS Requirement) — We all know there has to be some IRS requirements showing you rolled over the assets of the plan elsewhere..and, you would be correct. When you first established your plan you probably rolled over funds to “seed” the Solo-K? You probably remember you received a 1099-R coded with a “G” from the previous 401(k) administrator or IRA custodian. Well, you are now that employer, so it only makes sense that you now fulfill that same role in reporting to the IRS when funds have been “distributed” (non-taxable) from the plan. Sure, the concept of your (as Trustee to the plan) are issuing a 1099 to yourself (as the participant), but that is what you need to do. You will have sole responsibility to issue the 1099-R to yourself as the participant and forward a copy to the IRS.
- Distributing Funds as Soon as Administratively Feasible — You have terminated the plan, possibly already prepared the 1099-R form to correctly report the distribution as a non-taxable rollover…now you need to actually distribute the funds as soon as administratively possible. For many of you, you will be rolling over the funds into an IRA (self-directed or not). Once you have terminated the plan correctly, you will then rollover these funds as early as possible.
- Reporting 401(k) Rollover (Second IRS Requirement) — Okay, we spoke of the plan’s requirements to prepare the 1099-R reporting the “distribution” of funds from the plan, but as the individual (participant), you need to report the disposition of those funds. When you prepared the 1099-R as the employer, that was in your role as the employer and Trustee of the plan. But, as the participant of the plan, you need to report to the IRS what happened with these funds. In most cases, you will be rolling over the funds into a new retirement plan (e.g., IRA) as a non-taxable event. Remember when you initially rolled over funds INTO your Solo-K? You were instructed (and should have reported) to report the rollover into your plan on your 1040 tax return for the tax year in which the rollover occurred. The same rules now apply to you when you are taking a distribution from your plan as a rollover…you still need to report this on your individual tax return. In this case, since the funds are being distributed from a 401(k) plan, you will report this rollover on your 1040 tax form, line 16. You are still required to report this rollover on your 1040 tax return in the year in which you rolled out funds from your plan.
- Submitting a Final 5500-EZ Form to the IRS (Third IRS Requirement) — Many of you remember that for a Solo-K plan, there are only two times in which the Trustee will need to file this IRS form. The first is when the fair market value of the plan’s assets exceeds $250,000. Once you exceed this threshold, a 5500-EZ needs to be prepared for that year and every year thereafter. The second time….the IRS requires a final 5500-EZ when you terminate the plan so you can report to them the termination of the plan and distribution of assets (e.g., rolling over to an IRA). Keep this in mind…many people believe the 5500-EZ must be filed by July 31 of the following year in which the plan is terminated…and, that would be correct if you terminated the plan on 12/31 of the preceding tax year. However, the form must be submitted within 7 months after the plan is terminated! For example, if you terminated your plan on July 31, the Form 5500-EZ would be need to be filed within 7 months after that date (e.g., July 31).
Hopefully, these reminders will assist you when it comes time to terminate your Solo-K plan. Again, you should consult with your tax professional during this process, and make sure you let your Solo-K plan document sponsor aware so they can register your intention to terminate and forward to you termination paperwork for the plan.
As always, the information provided is intended to be educational in nature. It is not intended, nor should it be interpreted as, any form of tax, legal, financial or investment advice. One must always consult with their respective professional in all such matters.