Jun 28

Using a Solo 401(k) Plan to Invest in Options

When it comes to making investments with a solo 401(k) Plan, the IRS generally does not tell you what you can invest in, only what you cannot invest in.  The types of investments that are not permitted to be made using retirement funds is outlined in Internal Revenue Code Section 408 and 4975.  These rules are generally known as the “Prohibited Transaction” rules.

In addition to the Prohibited Transaction rules, the IRS imposes a levy or tax on certain transactions involving IRA funds.  In general, when one uses IRA funds to invest in an active business, such as a restaurant, store, factory that is operated through a passthrough entity such as a Limited Liability Company or Partnership or used nonrecourse financing, such as a nonrecourse loan or margin in a stock or trading account, a percentage of net profits or income generated by that activity could be subject to a tax. The tax imposed is often referred to as Unrelated Business Taxable Income or UBIT or UBTI.  The UBTI rules are generally outlined in Internal Revenue Code Sections 512-514.

The reason the UBTI tax rules do not impact most retirement investors, is that Internal Revenue Code Section 512(b) provides a general exemption for the following categories of income generated by a retirement account:  dividends, interest, royalties, rental income, and capital gain type transaction, As a result, since the majority of retirement investors purchase publicly traded company stock, which is exempted from the UBTI tax pursuant to Internal Revenue Code Section 512, the UBTI tax rules are not widely known.

When it comes to investing in options with a solo 401(k) Plan the question then becomes whether the investment would trigger the UBTI rules. An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price on or before a certain date. An option, just like a stock or bond, is a security. It is also a binding contract with strictly defined terms and properties.

According to the IRS , any gain from the lapse or termination of options to buy or sell securities is excluded from unrelated business taxable income. Note – the exclusion is not available if the organization is engaged in the trade or business of writing options or the options are held by the organization as inventory or for sale to customers in the ordinary course of a trade or business. Hence, if option trading is not being done as an active trade or business, then using a solo 401(k) Plan to invest in options would not trigger the UBTI tax rules.

For more information on using a solo 401(k) Plan to invest in options, please contact a tax professional at IRA Financial Group at 800-472-0646.

Jun 22

Using a Self Directed 401(k) Plan to Invest in Real Estate

Most people mistakenly believe that their 401(k) must be invested in bank CDs, the stock market, or mutual funds. Few Investors realize that the IRS has always permitted real estate to be held inside 401(k) retirement accounts. Investments in real estate with a Solo 401(k) are fully permissible under the Employee Retirement Income Security Act of 1974 (ERISA). IRS rules permit you to engage in almost any type of real estate investment, aside generally from any investment involving a disqualified person.

Advantages of Using a Solo 401(k) to Purchase Real Estate

Income or gains generated by a 401(k) Plan generate tax-deferred/tax-free profits. Using a Self-Directed 401(k) Plan, aka a Solo 401(k),  to purchase real estate allows Using a Solo 401(k) To Purchase Real Estatethe 401(k) to earn tax-free income/gains and pay taxes at a future date, rather than in the year the investment produces income.

With a Solo 401K, you can invest tax-free and not have to pay taxes right away – or in most cases for many years allowing your retirement funds to grow tax-free! All the income or gains from your real estate deals flow though to your 401(k) account tax-free!

Types of Real Estate Investments

Below is a partial list of domestic or foreign real estate-related investments that you can make with a Solo 401(k):

  • Raw land
  • Residential homes
  • Commercial property
  • Apartments
  • Duplexes
  • Condos/townhomes
  • Mobile homes
  • Real estate notes
  • Real estate purchase options
  • Tax liens certificates
  • Tax deeds

Investing in Real Estate with a Solo 401(k) is Quick & Easy!

Purchasing real estate with a Solo 401(k) Plan is essentially the same as purchasing real estate personally.

  • Set-up a Solo 401(k) Plan with the IRA Financial Group.
  • Identify the investment property.
  • Purchase the investment property with the Solo 401(k) Plan – no need to seek the consent of the custodian with a Solo 401(k) Plan since you serve as Trustee and Plan Administrator.
  • Title to the investment property and all transaction documents should be in the name of the Solo 401(k) Plan. Documents pertaining to the property investment must be signed by you as Trustee.
  • All expenses paid from the investment property go through the Solo 401(k) Plan. Likewise, all rental income checks must be deposited directly in to the Solo 401(k) Plan bank account. No 401(k) related investment checks should be deposited into your personal accounts.
  • All income or gains from the investment flow through to your 401(k) tax-free!

Solo 401K Solution

Structuring the Purchase of Real Estate with a Solo 401(k) Plan

When using a Solo 401(k) to make a real estate investment there are a number of ways you can structure the transaction:

1. Use your Solo 401(k) funds to make 100% of the investment

If you have enough funds in your Solo 401(k) to cover the entire real estate purchase, including closing costs, taxes, fees, insurance, you may make the purchase outright using your Solo 401(k). All ongoing expenses relating to the real estate investment must be paid out of your Solo 401(k) bank account. In addition, all income or gains relating to your real estate investment must be returned to your Solo 401(k) bank account.

2. Partner with Family, Friends, Colleagues

If you don’t have sufficient funds in your Solo 401(k) to make a real estate purchase outright, your Solo 401(k) can purchase an interest in the property along with a family member (non-disqualified person), friend, or colleague. The investment would not be made into an entity owned by the 401(k) owner, but instead would be invested directly into the property.

For example, your Solo 401(k) Plan could partner with a family member, friend, or colleague to purchase a piece of property for $150,000. Your Solo 401(k) Plan could purchase an interest in the property (i.e. 50% for $75,000) and your family member, friend, or colleague could purchase the remaining interest (i.e. 50% for $75,000).

All income or gain from the property would be allocated to the parties in relation to their percentage of ownership in the property. Likewise, all property expenses must be paid in relation to the parties’ percentage of ownership in the property. Based on the above example, for a $2,000 property tax bill, the Solo 401(k) would be responsible for 50% of the bill ($1000) and the family member, friend, or colleague would be responsible for the remaining $1000 (50%).

Isn’t Partnering with a family member in a Real Estate Transaction a Prohibited Transaction?

Likely not if the transaction is structured correctly. Investing in an investment entity with a family member and investing in an investment property directly are two different transaction structures that impact whether the transaction will be prohibited under Code Section 4975. The different tax treatment is based on who currently owns the investment. Using a Solo 401(k) Plan to invest in an entity that is owned by a family member who is a disqualified person will likely be treated as a prohibited transaction. However, partnering with a family member that is a non-disqualified person directly into an investment property would likely not be a prohibited transaction. Note: If you, a family member, or other disqualified person already owns a property, then investing in that property with your Solo 401(k) would be prohibited.

3. Borrow Money for your Solo 401(k)

You may obtain financing through a loan or mortgage to finance a real estate purchase using a Solo 401(k). Solo 401(k) participants can also borrow up to either $50,000 or 50% of their account value – whichever is less to help finance a real estate investment.

If using financing through a third-party loan to purchase real estate (other than a loan from the 401(k) Plan), one important point must be considered when selecting this option:

  • Loan must be non-recourse – A “prohibited transaction” is a transaction that, directly or indirectly involves the loan of money or other extension of credit between a plan and a disqualified person. Normally, when an individual purchases real estate with a mortgage, the traditional loan provides for recourse against the borrower (i.e., personal liability for the mortgage). However, if the 401(k) Plan purchases real estate and secures a mortgage for the purchase, the loan must be non-recourse; otherwise there will be a prohibited transaction. A non-recourse loan only uses the property for collateral. In the event of default, the lender can collect only the property and cannot go after the 401(k) Plan itself.

Note: Unlike a Self-Directed IRA LLC, pursuant to Internal Revenue Code Section 514(c)(9), in the case of a Solo 401(k) Plan, the Unrelated Business Income Tax (UBTI) does not apply when using nonrecourse leverage as part of a real estate transaction (unrelated debt-financed income – UDFI). Therefore, unlike a Self-Directed IRA LLC, using a Solo 401K to finance a real estate investment will not trigger UBTI – which imposes a tax in the range of 40% for 2016 on all income/gains relating to the debt financed portion of the investment.

To learn more about using a Solo 401(k) Plan to invest in real estate, please contact one of our Solo 401(k) Plan Experts at 800-472-0646 for more information.

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Jun 16

Using Your 401k with the Rollover Business Startup

Leaving your job or thinking of leaving your job and a have 401(k) qualified retirement plan or other type of retirement plan? Why not use your retirement funds to invest in yourself instead of a turbulent stock market? With the recent turmoil in the U.S. stock market and the volatility expected to continue, why not use your 401(k) funds on a business you can run, manage, and even earn a salary from? Isn’t it time you placed your retirement future in your hands rather than trust Wall Street bankers?  The IRS has a solution call the Rollover Business Startup, or ROBS.

With IRA Financial Group’s Business Acquisition Structure, similar to the IRS-approved ROBS structure, a new C Corporation is formed which will adopt a 401(k) Qualified Plan. Your existing retirement funds can then be rolled into the newly adopted 401(k) Plan tax-free. The 401(k) Plan will then purchase the stock of the new corporation. The new corporation will then use those funds to purchase a new business or franchise tax-free!

With the IRS compliant Business Acquisition Structure, you can earn a reasonable salary from your new business or franchise. You can also use your new 401(k) Plan to make high tax-deductible contributions – $53,000 ($59,000 if you are over the age of 50) and even borrow up to $50,000 for any purpose.

What does the IRS Say about this?

The Internal revenue Code explicitly permits the purchase of corporate stock by a 401(k) Qualified Plan. The IRS has repeatedly confirmed that the structure is legal but has expressed some concern about the potential for abuse by individuals not being properly advised by tax professionals. For example, the IRS has documented the following instances of abuse when it comes to using retirement funds to invest in a business: (i) the employees of the business are not properly informed that a 401(k) qualified plan has been adopted by the business and that they are eligible to participate, (ii) the individual that established the structure with no intention to use for business purpose and the sole purpose for establishment was to get access to the retirement funds without penalty, or (iii) the structure would be used to purchase assets for personal use with the retirement funds.

Therefore, the IRS has stressed that it is imperative that when using retirement funds to establish or finance a new or existing business or franchise, it is necessary to work with qualified tax professionals who have experience in this area and can make sure the structure is established in full compliance with IRS and ERISA rules and procedures.

IRA Financial Group’s Business Acquisition structure is an IRS compliant legal structure that one can use to invest retirement funds into a business they will operate and be employed by. Work with IRA Financial Group’s in-house tax professionals to help establish your IRS compliant Business Acquisition Solution.

Using Your 401k with the Rollover Business StartupUsing IRA Financial Group’s Business Acquisition Solution is the only way you will be able to use your retirement fund to legally start or finance a new or existing business tax-free and penalty free! Whereas, with a self-directed IRA LLC, an individual can invest retirement funds in a private business, but not a business that he or she would be involved in – that would be considered a prohibited transaction pursuant to Internal Revenue Code 4975. While, with a Solo 401K, an individual could only borrow up to $50,000 or 50% of his or her account value whichever is less and use that loan for any purpose, including starting or financing a business. However, if an individual required more than $50,000 for a business, then the Business Acquisition structure is the only solution that will allow one to use their retirement funds to start or finance a business tax-free and without penalty!

IRA Financial Group partner Adam Bergman has a written on the topic with the book available on Amazon entitled Turning Retirement Funds Into Start-Up Dreams Financing and Retirement Funding Options For Your Start-Up Business.

To learn more about the advantages of using a Business Acquisition Structure to start or finance a business using retirement funds, please contact a retirement expert at 800-472-0646.

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Jun 14

IRA Financial Group Announces Expanded Solo 401(k) Plan Annual Services to Include Filing of IRS Form 5500-EZ

Solo 401(k) plan clients of the IRA Financial Group to be offered IRS Form 5500-EZ completion services

IRA Financial Group, the leading provider of self-directed Solo 401(k) plans, announces a new service for its annual tax and compliance service for Solo 401(k) plan clients to include the completion of the annual IRS information form – 5500-EZ.

“Due to string client demand, we are excited to expand our annual tax and compliance service to include the completion of the IRS Form 5500-EZ for no additional fee for Solo 401(k) plan clients with plan assets exceeding $250,000,” stated Adam Bergman, a partner with the IRA Financial Group. “The string growth in our business has allowed us to add resources to allow us to expand our annual Solo 401(k) compliance fee to include to completion of the IRS Form 5500—EZ,” stated Mr. Bergman.

IRA Financial Group Announces Expanded Solo 401(k) Plan Annual Services to Include Filing of IRS Form 5500-EZA Solo 401(k), also known as an individual 401(k) or self-employed 401(k) plan was created specifically for sole proprietors, small businesses and independent contractors such as consultants. A Solo 401(k) Plan can be adopted by any business with no employees other than the owner(s). The business can be established as a sole proprietorship, LLC, corporation, or partnership. With a Solo 401(k) plan, there is generally no annual filing requirement unless the solo 401(k) plan participant’s plan assets exceed $250,000 in assets. In such a case, the Solo 401(k) Plan participant will need to file a short information return with the IRS (Form 5500-EZ). The IRS Form 5500-EZ is due on July 31. Now, IRA Financial Group is offering all its Solo 401(k) Plan clients the service of completing the IRS Form 5500-EZ for no additional fee. “It is our goal to make sure to make sure all applicable 401(k) Plan clients that are required to file an IRS Form 5500-EZ are getting the necessary support they need to make sure the form is completed properly and in a timely manner,” stated Mr. Bergman.

For 2016, the Solo 401(k) Plan, offers one the ability to make annual contributions of up to $53,000 ($59,000 for those over the age of 50), borrow up to $50,000, as well as use his or her retirement funds to make almost any type of investment on their own tax-free and penalty free without requiring the consent of any custodian or person.

The IRA Financial Group was founded by a group of top law firm tax and ERISA lawyers who have worked at some of the largest law firms in the United States, such as White & Case LLP, Dewey & LeBoeuf LLP, and Thelen LLP.

To learn more about the IRA Financial Group please visit our website at http://www.irafinancialgroup.com or call 800-472-0646.

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Jun 13

How Are Solo 401k Loans Done?

As long as the plan documents allow for it & the proper loan documents are prepared and executed, a participant loan can be made for any reason. The Solo 401(k) loan is received tax free and penalty free. There are no penalties or taxes due provided loan payments are paid on time. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) for any investment purposes, including real estate, funding your business or a new business, tax liens, private placements, etc.

What is a Solo 401(k) Plan Loan?

A Solo 401(k) loan is permitted at any time using the accumulated balance of the Solo 401(k) as collateral for the loan. A Solo 401(k) participant can borrow up to $50,000 or 50% of their account value – whichever is less. This loan has to be repaid over an amortization schedule of 5 years or less with payment frequency no greater than quarterly. The interest rate must be set at a reasonable rate of interest, generally interpreted as prime rate as per the Wall Street Journal. As of 12/21/15 prime rate is 3.50%, which means participant loans may be set at a very reasonable Interest rate. The Interest rate is fixed based on the prime rate at the time of the loan application.

How Can This be Done?

How Are Solo 401k Loans Done?Internal Revenue Code Section 72(p) and the 2001 EGGTRA rules allow a Solo 401(k) Plan participant to borrow money from the plan tax-free and without penalty. As long as the plan documents allow for it and the proper loan documents are prepared and executed, a participant loan can be made for any reason. The solo 401(k) loan is received tax-free and penalty-free. There are no penalties or taxes due provided loan payments are paid on time. The IRA Financial Group Solo 401(k) Plan documents will allow you to use a loan from your Solo 401(k) for any investment purposes, including real estate, funding your business or a new business, tax liens, private placements, etc. Our in-house retirement tax professionals will assist you in completing the Solo 401(k) Plan documents in a timely manner once your Solo 401(k) Plan has been adopted.

When can a Participant Loan be Useful?

As a result of the recent economic meltdown, banks and other financial institutions have severely limited their lending capacity to self-employed business owners, thus, causing grave financial pressure on self-employed business owners. The Solo 401(k) plan is a perfect structure for any self-employed business owner seeking immediate funds for their business or to help pay personal expenses. Solo 401(k) participants can borrow up to $50,000 or 50% of their account value, whichever is less, to help finance or operate their business. For example, an individual can take a Solo 401(k) Plan loan and use those funds to pay off a mortgage, credit card, any personal expense, go on vacation, or start and finance a business.

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

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Jun 10

No California Franchise Tax When Using an LLC with a Solo 401(k) Plan to Buy Real Estate

There is only one exemption to the California annual minimum franchise tax of $800 and that is for a title holding companies whose sole purpose is to acquire, hold title to, and collecting from real property.

No California Franchise Tax When Using an LLC with a Solo 401(k) Plan to Buy Real EstateAs per California Franchise Tax rules Section 23701(h) and (x), a title holding company whose sole purpose is acquire, hold title to, and collect income from real property and who turns over the entire amount less expenses to the 401(k) plan owner would be exempted from paying the California minimum franchise fee of $800. The rules under 23701(h) state that any corporation or LLC that is owned by an organization referenced in IRC 501(c)(2), which include 401(k) qualified retirement plans, will be considered a title holding company and will be exempt from the CA franchise tax. Section 23701(x) goes a step further than the IRS Tax Code which only references corporations and adds single member LLCs and partnerships as entities that can be treated as title holding companies, so long as they are owned by an exempt organization, such as a 401(k) plan. The language in Section 23701 follows the language in IRC 501(c), which only refers to 401(K) qualified retirement plans and not IRAs as exempt organization. Therefore, a 401(k) plan, but not an IRA can own an LLC in California for the purpose of acquiring, holding title to, and collecting income from real property without being subject to the $800 minimum franchise tax.

How do you apply?

  • An application for exemption is submitted to the Franchise Tax Board – Form 3500 – https://www.ftb.ca.gov/forms/misc/3500.pdf
  • A filing fee of $25 is paid
  • The Franchise Tax Board will then issue a determination

Summary

In order to take advantage of the one exemption to the annual California franchise fee one will need to satisfy the following requirements:

  • Use a 401(k) plan – an IRA is not treated as an exempt organization for purposes of satisfying the title holing company rules.
  • Establish a single member or multiple member LLC in California
  • Apply for the exemption with the California Franchise Tax Board using Form 3500
  • The LLC’s sole purpose must be for the purpose of acquiring, holding title to, and collecting income from real property and who turns over the entire amount less expenses to the 401(k) plan owner

Talk to one of our Solo 401(k) plan experts at 800-472-0646 who can help you learn more about how you can use a California LLC owned by a 401(k) plan to buy property in California without being required to pay the annual minimum franchise fee of $800.

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Jun 07

IRA Financial Group Announces Strong Demand for Solo 401(k) Plan With Non-Deductible Contribution Option

Strong Interest in Solo 401(k) Plan with non-deductible after-tax contribution option

IRA Financial Group, the leading provider of checkbook control self-directed Solo 401(K) plans, announces strong demand for the Solo 401k plan with a non-deductible Contribution option. The advantage of using a Solo 401(k) plan, which includes a nondeductible contribution option, is that it allows one to reach the annual contribution limit much quicker. Under the Solo 401(k) plan Non-Deductible Contribution tax rules, after tax deferrals (not Roth but not pre-tax) can be made dollar-for-dollar up to $53,000 of $59,000, including other plan contributions (employee deferrals and profit sharing). For example, a self-employed 40 year old individual earned $100,000 in 2016, he or she would be able to make a maximum employee deferral contribution of $18,000 in pre-tax or Roth and make an after tax contribution dollar-for dollar equal to $35,000, the difference between $53,000 (the maximum annual 401(k) contribution for 2016) and $18,000, the maximum employee deferral contribution limit. Those contributions can be then be converted to Roth without tax. Unfortunately, not all Solo 401(k) plans allow for nondeductible contributions, but IRA Financial Group’s 401(k) plan documents do.

According to Adam Bergman, a partner with the IRA Financial Group and author of the book, Going Solo: America’s Best Kept Retirement Secret For the Self-Employed – What Financial Institutions Won’t Tell You About Saving for Retirement, “The advantage making after-tax contributions versus a profit sharing contribution is that you can make a dollar for dollar contribution versus a profit sharing contribution, which is based off a percentage of your compensation (20% or 25%). If a profit sharing contribution was made instead of an after-tax contribution, the individual would only be able to make a $20,000 contribution giving him or her an annual contribution of just $38,000 versus $53,000, if employee deferrals were combined with after-tax contributions.”

IRA Financial Group Announces Strong Demand for Solo 401(k) Plan With Non-Deductible Contribution OptionNon-deductible Solo 401(k) plan contributions are not new, but new IRS regulations (Notice 2014-54) make after-tax contributions more attractive in a few ways. The new IRS regulations allow the retiree to effectively segregate the after-tax assets from the pre-tax funds. The pre-tax funds can be rolled into a Traditional IRA, whereas the after-tax dollars can be converted into a Roth IRA. “Prior to Notice 2014-54, there was a question as to whether after-tax funds can be converted to a Roth IRA. Notice 2014-54 clarified this rule and allows the pre-tax and after-tax funds that were distributed from a plan on a pro-rated basis to be separated once a distribution is made. One nice thing about after-tax contributions: The salary deferral limits that apply to other participant contributions do not necessarily apply to after-tax contribution,” stated Mr. Bergman.

With IRA Financial Group’s Solo 401K plan, self-employed individuals or small business owners with no employees can benefit by making high annual contributions – up to $53,000 – with an additional $6,000 catch-up contribution for those over age 50, make traditional as well as non-traditional investments, such as real estate, as well as borrow up to $50,000 or 50% of their account value tax-free and penalty free. IRA Financial Group’s self-directed 401(k) plan online platform is a trustee directed plan meaning the trustee and not the custodian is in charge of making investment decisions on behalf of the plan. With a Solo 401(k) plan, in most cases the trustee will be the plan participant providing the plan participant with greater control and investment authority over his or her retirement funds. In addition, with IRA Financial Group’s Solo 401K Plan, the plan account can be opened at any local bank, including Chase, Wells Fargo, and even Fidelity.

IRA Financial Group is the market’s leading provider of “checkbook control” Self Directed IRA and Solo 401(k) plans. IRA Financial Group has helped thousands of clients take back control over their retirement funds while gaining the ability to invest in almost any type of investment, including real estate without custodian consent.

To learn more about the IRA Financial Group please contact us @ 800-472-0646.

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Jun 02

History of the Solo 401k Plan

401(k) plans are named after the section of the Internal Revenue Code in which they appear, and apply to private sector employers. A solo 401(k) plan, also called an individual 401(k), a one-participant plan, self-employed 401(k) or self-directed 401(k) plan is a qualified retirement plan that was designed specifically for the self-employed or small business owner with no employees. To many peoples surprise, the solo 401(k) plan is not a new type of retirement plan. The solo 401(k) plan is not a term of art or even fond in the Internal Revenue Code. The Solo 401(k) Plan, in general, has the same rules and requirements as company 401(k) plan, but is not subject to the complex ERISA rules which make employee 401(k) plans so costly. In other words, the solo 401(k) Plan is simply a 401(k) plan that is not subject to the ERISA rules because the adopting employer does not have any full-time employees, other than their spouse(s). The growth in the popularity of the solo 401(k) plan began with the enactment of the Economic Growth and Tax Reconciliation Relief Act of 2001 (EGTRRA) which armed the solo 401(k) plan with all the attractive features of the better known employer 401(k) plan.

The Solo 401K Plan has become the most popular retirement plan for the self-employed. This is exactly what the IRS envisioned when it created the Solo 401K Plan, also known as the Individual 401K or Self-Directed 401K Plan.

Pre-1978 – Deferred compensation arrangements (“cash or deferred arrangements,” known as CODAs) which allowed some compensation (and resulting tax liability) to be deferred, predate 401(k) plans by several decades and are viewed as their precursors.

In the 1950s, a number of companies, particularly banks, added to their profit-sharing plans a new feature that came to be called a “cash or deferred arrangement,” or CODA. Each year, when employees were awarded profit-sharing bonuses, they were given the option to deposit some or all of the bonus into the plan instead of receiving the bonus in cash. Even though the employee had the right to receive the bonus in cash, which normally would trigger immediate income tax, a CODA sought to treat any amount the employee contributed to the plan as if it were an employer contribution, and therefore tax-deferred.

In 1956, the IRS issued the first in a series of rulings allowing profit-sharing plans to include a CODA and still be eligible for the favorable tax treatment accorded employer contributions.

The Employee Retirement Income Security Act of 1974 (ERISA) contained sweeping changes in the regulation of pension plans, and created rules regarding reporting and disclosure, funding, vesting, and fiduciary duties. Although ERISA was aimed mostly at “assuring the equitable character” and “financial soundness” of Defined Benefit pension plans, the Act contained numerous provisions impacting Defined Contribution plans (like profit-sharing plans, and eventually 401(k) plans).

In 1962, after much deliberation, Congress enacted the Self-Employed Individuals Tax Retirement Act of 1962, extending some of the benefits of qualified plan participation to self-employed persons. Plans covering self-employed individuals were often called Keogh or H.R. 10 plans, after the principal sponsor and bill number in the House of Representatives.

The 1962 legislation required plans covering self-employed individuals to satisfy all of the qualification criteria for plans covering only common law employees and imposed numerous additional requirements and limitations.

Is the Solo 401(k) Plan Subject to ERISA?

The DOL regulations provide that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA. Pursuant to Department of Labor Regulations 2510.3-3(c) –

(1) An individual and his or her spouse shall not be deemed to be employees with respect to a trade or business, whether incorporated or unincorporated, which is wholly owned by the individual or by the individual and his or her spouse, an

(2) A partner in a partnership and his or her spouse shall not be deemed to be employees with respect to the partnership.

The provisions of Title I of ERISA, which are administered by the U.S. Department of Labor, were enacted to address public concern that funds of private pension plans were being mismanaged and abused. ERISA was the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans. The goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans.

The provisions of Title I of ERISA cover most private sector employee benefit plans. Employee benefit plans are voluntarily established and maintained by an employer, an employee organization, or jointly by one or more such employers and an employee organization. Pension plans–a type of employee benefit plan–are established and maintained to provide retirement income or to defer income until termination of covered employment or beyond. Other employee benefit plans are called welfare plans and are established and maintained to provide health benefits, disability benefits, death benefits, prepaid legal services, vacation benefits, day care centers, scholarship funds, apprenticeship and training benefits, or other similar benefits.

History of the Solo 401k PlanIn general, ERISA does not cover plans established or maintained by governmental entities or churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment or disability laws. ERISA also does not cover plans maintained outside the United States primarily for the benefit of nonresident aliens or unfunded excess benefit plans. In addition, ERISA does not cover plans involving self-employed business owners or entity’s with no full-time employees other than the business owner(s) and spouses(s) since the goal of Title I of ERISA is to protect the interests of participants and their beneficiaries in employee benefit plans of owners, for plans that only cover owners, there is no need for ERISA since there are no non-owner employees to protect.

Even though a solo 401(k) plan is not subject to Title 1 of ERISA, the ERISA rules are still looked at as a reference because a solo 401(k) Plan is still a qualified retirement plan.

1978 – The Revenue Act of 1978 included a provision that became Internal Revenue Code (IRC) Sec. 401(k) (for which the plans are named), under which employees are not taxed on the portion of income they elect to receive as deferred compensation rather than as direct cash payments. The Revenue Act of 1978 added permanent provisions to the IRC, sanctioning the use of salary reductions as a source of plan contributions. The law went into effect on Jan. 1, 1980. Regulations were issued in November of 1981.

1981 – The IRS issued proposed regulations on 401(k) plans that sanctioned the use of employee salary reductions as a source of retirement plan contributions. Many employers replaced older, after-tax thrift plans with 401(k)s and added 401(k) options to profit-sharing and stock bonus plans.

Although a tax code provision permitting cash or deferred arrangements (CODAs) was added in 1978 as Section 401(k), it was not until November 10, 1981 that the IRS formally described the rules for these plans. In the years immediately following the issuance of these rules, large employers typically offered 401(k) plans as supplements to their Defined Benefit plans, with few employers offering them to employees as stand-alone retirement plans. November 10, 1981 marks the birth of the modern 401(k) plan. After that date, companies began to add 401(k) contributions to their profit-sharing plans, convert after-tax thrift-savings plans to 401(k) plans, or create new 401(k)-type DC plans.

Within two years, surveys showed that nearly half of all large firms were either already offering a 401(k) plan or considering one.

Over the years, most notably in 1974 and 1981, the rules for plans covering self-employed individuals were liberalized and elaborated, and rules applicable to all plans, including those covering only common law employees, were tightened by subjecting them to some of the restrictions originally applicable only to plans covering self-employed persons.

In 1982, Congress adopted a unified system for all qualified plans, including those covering self-employed persons, finding the logic of a unified system so obvious that only a single sentence was sufficient to justify the change: “Congress believed that the level of tax incentives made available to encourage an employer to provide retirement benefits to employees should generally not depend upon whether the employer is an incorporated or unincorporated enterprise.

In 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) took another step to spur saving through 401(k) and other DC plans. EGTRRA increased the annual Defined Contribution plan contribution limit, albeit not higher than the $45,475 limit in place in 1982. In addition, the restrictions placed on employee deferrals were loosened as the limit on pre-tax contributions was increased and additional “catch-up” contributions were allowed for employees age 50 and older. With the goal of preserving retirement accounts even when job changes occur, EGTRRA increased the opportunities for rollovers among various savings vehicles (401(k) plans, 403(b) plans, 457 plans, and IRAs). In addition, EGTRRA permitted 401(k) plans to offer a “Roth” feature for after-tax contributions.

Prior to 2002, most self-employed individuals tended to use a SEP IRA or SIMPLE IRA as a retirement vehicle. However, in 2002 the Economic Growth and Tax Reconciliation Act of 2001 (EGTRRA) became effective and generally provided the small business owner with no employees or the self-employed the same advantages/benefits of a conventional 401(k) Plan.

EGTRRA include various reforms that contributed to the growing popularity of the Solo 401(k) Plan versus the SEP IRA and SIMPLE IRA. Below is a list of several key EGTRRA provisions that led to growth in popularity of the Solo 401(k) Plan:

1. EGTRRA increased the deductible profit sharing contribution limit from 15 percent to 25 percent of employees compensation and changed the application of deferrals so that they are not counted against the employer’s maximum deductible contribution amount.

2. EGTRRA increased the annual contribution limit per plan participant to the lesser of an annual maximum dollar amount of 100 percent of the participant’s compensation. Prior to EGTTRA, an eligible participant of a Solo 401(k) Plan was not eligible to make employee deferrals.

3. EGTRRA created the designated Roth contribution option for 401(k) and 403(b) plans. This provision allowed plan participants to designate all or a portion of their employee deferrals as Roth (after-tax) contributions.

EGTRRA modified Internal Revenue Code Section 4975(f)(6) to allow for the expansion of the loan feature to apply to unincorporated business (a sole proprietorship). Legislation passed in August 2006, the Pension Protection Act (PPA), also aims to foster retirement savings and 401(k) plan participation. Among its many provisions, the Act makes the EGTRRA pension rule changes permanent and, additionally, makes some of the rules governing pension plans more flexible. For example, the PPA encourages employers to automatically enroll employees in their 401(k) plans and allows employers to offer appropriate default investments. These measures seek to increase participation in 401(k) plans and facilitate the best use of these plans’ options by workers.

The marketing for this type of plan is aimed at business owners who do not have any employees, other than themselves and perhaps their spouse. Many of the advantages of these Solo 401K plan generally vanish if the employer expands the business and hires more employees since the employer would now be required to adopt a conventional Solo 401K Plan and must include the new employee(s) in the plan. No matter what the plan is called, it must meet the rules of the Internal Revenue Code. If employees are hired and they meet the eligibility requirements of the plan and the Code, they must be included.

Thus, the Solo 401K Plan is an IRS approved plan that was initially established into law in 1962 but was greatly enhanced by the 2002 EGTRRA law. Now, the Solo 401K Plan is the most popular retirement plan for the self-employed or small business owner.

As of 2013, The 401(k) plan retirement system now holds $2.8 trillion in assets on behalf of more than 50 million active participants and millions of former employees and retirees. The number of workers covered by 401(k) plans continues to expand, which has been a result of rules attempted to encourage more employers, small and large, to open 401(k) plans by making them as simple and accessible as possible.

To learn more about the advantages of using a Solo 401(k) Plan, please contact one of our Solo 401(k) Plan experts at 800-472-0646 for more information.

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