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IRS Rules and Guidelines Concerning a Solo 401(k)

The “Solo 401K plan” is an IRS approved type of qualified plan , which is suited for business owners who do not have any employees, other than themselves and perhaps their spouse. The “one-participant 401(k) Plan” is not a new type of plan. It is a traditional 401(k) plan covering only one employee. The plans have the same rules and requirements as any other 401(k) plan. The surging interest in these plans is a result of the EGTRRA tax law change that became effective in 2002. The law changed how salary deferral contributions are treated when calculating the maximum deduction limits for contributions to a 401(k) plan. This change created an opportunity for some people to put away additional amounts toward their retirement.

Solo 401(k) Plans are generally permitted to engage in most types of investments, however, if a Solo 401(k) Plan engages in certain types of “prohibited transactions” it may trigger a prohibited transaction which could lead to disqualification of the Solo 401(k) Plan and severe tax consequences. Therefore, it is important that you familiarize yourself with the Solo 401(k) prohibited transaction rules.

  • Internal Revenue Code Section 4975 – IRC provision referencing tax on prohibited transactions.
  • Internal Revenue Code Section 512 – IRC provision describing unrelated business taxable income
  • Internal Revenue Code Section 511 – IRC provision imposing tax on unrelated business income.
  • Internal Revenue Code Section 513 – IRC provision describing an unrelated trade or business.
  • Internal Revenue Code Section 401 – Primary IRC provision relating to the 401(k) Plan
  • Internal Revenue Code Section 72 – Primary IRC Section relating to the 401(k) Plan loan

Please contact one of our Solo 401(k) Experts at 800-472-0646 for more information.

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