Have you amended your solo 401(k) plan lately or are you planning on paying penalties? IRS Rev Proc. 2007-44 requires that every 401(k) plan, including solo 401(s)s,  be updated and amended at least every six years.

PLANS MUST BE UPDATED EVERY 6 YEARS

This six year cycle doesn’t begin on the date you established your solo 401(k) but instead on the date that the plan document you are using was approved or last amended. So, for example, if you established a solo 401(k) in 2010 and if you used a plan last updated or amended in 2008 then your plan amendment due date has passed and your plan is now out of compliance and will be subject to penalties.

LARGE PENALTIES FOR NON-COMPLIANCE

Unfortunately, we are running across more and more self directed clients who have self directed solo 401(k) plan documents that have not been amended and kept up to date properly and as a result their plan isn’t in compliance with the law. The penalties for non-compliance are steep and increase the longer your plan is out of date. We’ve seen fines in the tens of thousands of dollars for plans out of compliance for over a couple of years. Don’t forget your obligation to keep the solo 401(k) plan updated.

CORRECTION PROGRAMS

The IRS does have a Voluntary Corrective Program that can be used to fix plan mistakes such as plan update failure but you must avail yourself of these options before the IRS issues penalties and fines. There are still typically fees for using the plan correction program but they are insignificant when compared to the penalties that can be assessed for failing to update your plan or to keep it up to date. While self directed solo 401(k) plans established with self directed IRA custodians have generally been kept in compliance, the plans we find that are typically out of compliance are those set up by third party companies who simply sell you documents on-line and leave you to figure everything else out. And, unfortunately, this is one of those things that isn’t being figured out.

Talk to your professional plan administrator, if you have one, or contact us at the law firm to determine if your plan is in compliance with the plan amendment requirements.

By: Mat Sorensen, Attorney and Author of The Self Directed IRA Handbook

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