There will come a time for most of us (hopefully) where we need to terminate our Solo-K plan. While this is not difficult to do, please do not forget to terminate the plan. Remember you are the Trustee for the plan, and no one else can direct the plan to be terminated. It is your plan!
Fortunately, you do have up to 12 months to administratively close out the plan. While not difficult, it is not as easy as just closing your bank/brokerage account housing the 401(k) funds. Think of this visual…the plan doesn’t get created by just depositing a check, nor does it terminate with a check!
Talk to your tax professional! At minimum, you will need to correctly report the rollover of your plan funds to another plan. You want to make sure this is done correctly.
Whether this is PGI or another company, we need to know of your intent to terminate the plan. We need to terminate the plan and properly register the termination. This is done for your protection.
If the plan document sponsor is not aware of your plans to terminate the plan and the termination date, we are unable to officially terminate the plan. As part of termination process, your plan document sponsor (PGI) will send you termination paperwork to complete for your files with the plan. You will want to keep this on file in case you are ever audited.
You may remember that when you started your Solo-K and had rollover funds come into the plan, the previous plan sent you a 1099-R form reporting the distribution. The IRS also received a copy. As the business owner and Trustee of your plan, it is now your responsibility to report this rollover as well since funds are leaving the plan. You will issue the 1099-R to yourself and send a copy to the IRS.
Obviously, you will do this quickly as you will be wanting the funds/assets moved out of the plan as soon as it is administratively possible.
In addition to the 1099-R, you will report the rollover of plan funds to another plan (e.g., IRA). This tax-reporting must occur in the year in which the distribution occurred. Similar to when you reported funds being rolled into the Solo-K, you will report the funds now going into another plan. Think of now doing everything in reverse.
If you fail to do this, you will most likely receive a letter from the IRS in about 2 years “suggesting” that you owe them taxes on that rollover. Why create stress in your life for simply not completing this simple step. Read more about reporting your rollover.
While you are operating your Solo-K, you do not have to file a 5500-EZ if the assets are valued under $250,000. However, regardless of the FMV of the plan when you terminate the plan, you must file a final 5500-EZ. This is a critical requirement that can assess financial penalties for failure to submit or submit timely (7 months after termination of the plan).