Solo-K gone wild

[401k Conundrums]

New client has solo-k for 15 years, didn't realize he needed to be filing returns once his assets exceeded $250K.  He thought all was well, until he tried to transfer his plan to a new custodian. He has hired employees and wanted to allow the employees to participate in the plan and thought the new bundled provider would be a better fit for that. Provider says whoa.. wait a minute...we cant take your plan (at least not like this). You need a TPA. So here we are...another solo-k gone wild.     Unbeknownst to the client, his employees current and past are already eligible for the plan because the solo-k has immediate eligibility (and immediate vesting).  So he's looking at some missed deferral opportunities, some top heavy failures, some failed ADP issues.  Not to mention his plan document has not been amended or restated since it was initially adopted with that cute little account application/adoption agreement...and he needs 15 years of 5500 filings to be completed.   

So my question for today is:  part of his filings should have been EZ filings and part of his filings (after adding employees) should have been SF filings.  Would you file all the late filings as SF filings under the DFVCP because he now meets title I of ERISA.  Or, should the years where he was truly a solo-k be filed on an EZ through the IRS's penalty relief program? 

[RatherBeGolfing]

If you are just asking which form to file, you file an EZ for the years it was a one participant plan, and an SF or (5500 with Sch I) for the years when it was not a one participant plan.

I would take it to an ERISA attorney ASAP.  Can he even afford to "save" the plan considering all the issues? 

[Lou S.]

That's a good question that I don't know the answer to but since they are separate programs I think you have two separate batches to file but would probably want to do them concurrently and under the cover letters probably want to note which years you are filing under which programs.

 

 

[401k Conundrums]

There are significant assets in the plan, doesn't want a plan disqualification if at all possible.  We are discussing with an ERISA attorney...but they too have not ran into this exact issue so just reaching out to see if anyone else may have been in this predicament and how they handled the late filings.  

[RatherBeGolfing]

1 hour ago, 401k Conundrums said:

There are significant assets in the plan, doesn't want a plan disqualification if at all possible.  We are discussing with an ERISA attorney...but they too have not ran into this exact issue so just reaching out to see if anyone else may have been in this predicament and how they handled the late filings.  

Ok.  Well, the 5500 is the easy part.  EZ for years when no employees were covered, otherwise SF.  The user fee is capped at two years, so the penalty for late 5500s shouldn't exceed $2,500 assuming at least two EZs and two SFs (2x$500 +2x$750).

[Bill Presson]

1 hour ago, RatherBeGolfing said:

Ok.  Well, the 5500 is the easy part.  EZ for years when no employees were covered, otherwise SF.  The user fee is capped at two years, so the penalty for late 5500s shouldn't exceed $2,500 assuming at least two EZs and two SFs (2x$500 +2x$750).

EZ late filer penalty cap is 3x$500

[RatherBeGolfing]

12 hours ago, Bill Presson said:

EZ late filer penalty cap is 3x$500

Indeed it is, thanks Bill.

[Paul I]

Before doing any 5500 filings, follow @RatherBeGolfing's suggestion to involve an ERISA attorney.  Given the long period of time the plan was operating out of compliance, the attorney and TPA together can work with the client to determine if all of the information is available to complete the forms accurately, and is available to apply remedial actions to bring plan into compliance.  If the information is incomplete, then the path forward likely will ultimately involve negotiating a resolution with the IRS and DOL. 

Sometimes in situations where plans have been out of compliance for many years, the cost and effort try to to reconstruct exactly what should have happened versus what did happen, and then trying to apply the prescribed remedies can be economically fatal to the company.  A knowledgeable ERISA attorney may be able to propose another strategy that could be painful but not fatal.

Having a strategy for remediation can help determine when the 5500 filings should be submitted.

[Peter Gulia]

I’ve worked on reconstructing (at once) more than 20 years’ plan reports and financial statements.

If one decides to use the delinquent-filer program, assemble completely all years’ Form 5500 reports before submitting anything. Test them for EBSA’s edit checks. Test each report for internal logical consistency. Test all the reports for year-to-year and other logical consistency.

Consider also that the business organization and its owner (and we guess those are the plan’s administrator and trustee) might want the evidence-law privilege for confidential lawyer-client communications.

For work not done by the lawyer or her assistants, consider having the lawyer engage the third-party administrator under a Kovel arrangement to preserve that confidential-communications privilege.

This is not advice to anyone.

[401k Conundrums]

Thank you all, for your comments and suggestions.  I've completed solo-k cleanups in the past but none that crossed over to Title I plan status.  I do wish marketing teams who are out there selling these would be more transparent and inform business owners about the potential pitfalls and the benefits of involving a TPA.  

[ErnieG]

This is a text book how not to.  We design many of these especially now with gig and independent workers out there.  It is not the plan that went south it’s the fact it did not have a TPA.  We make it explicitly clear a TPA is needed from the start. The problem many vendors offer this type of Plan, offer a one-time Plan Document and that’s it.  The issue also is with the “Google Advisor”—do it yourself, it’s cheaper. 
 

[Jakyasar]

For more fun stories on really screwed up situations, did you see today' Erisapedia webinar " best of the worst in 2025" presented by Ferencyz Group? You cannot make up some of these stories. It makes the problem above a breeze between providing missed benefits and missed filings

[John Feldt ERPA CPC QPA]

Yes, Ilene’s case was bonkers bad.