Does a Solo 401(k) plan’s user know she needs a TPA’s help?

[Peter Gulia]

Bloomberg this morning features an article about micro retirement plans. Isabelle Lee, Wall Street Pushes Solo 401(k)s as More Americans Work for Themselves, Bloomberg (Jan. 23, 2026, 6:00 AM EST).

We need not repeat an observation that there is no such thing as a Solo 401(k) plan. Rather, let’s recognize the sales label for what many businesspeople believe it describes: an individual-account (defined-contribution) retirement plan the plan sponsor and its owner expect to use for participation by only one worker, the owner.

BenefitsLink neighbors, what are you seeing happen in this space:

Do more users of these plans recognize that, to run a plan without trouble, one needs a TPA’s services?

Are there many who try to be a do-it-yourselfer (until it fails)?

Aside from a failure to file a Form 5500 return, which other errors are detected?

Are CPAs and other tax preparers a useful alternative for filing Form 5500 returns? Or, not so much?

Beyond a Form 5500 return, what are other failure points?

[C. B. Zeller]

As of right now, it looks like the article is running under the title "America’s Booming Solo Workers Embrace $72,000 Tax Shelter"

Besides Form 5500, possible pain points include:

• Capturing any non-owner employees who are required to be covered (including long-term part-time employees)
• Analysis of related employers which could result in a controlled group or affiliated service group
• With respect to an unincorporated business, calculation of net earned income, both for purposes of limiting contributions to 100% of compensation and deduction of employer contributions to 25% of compensation
• Applying limitations on distributions
• Applying mandatory tax withholding on distributions
• Reporting distributions on Form 1099-R
• Applying a plan's loan provisions

[Peter Gulia]

Thanks.

(With Bloomberg and many publishers, an article’s title and content vary with the subscription and edition one uses.)

Do you think most users of these plans engage a TPA when one establishes the plan?

Or do most engage a TPA only after a Form 5500 reporting failure?

Or after some other failure the IRS detects?

[justanotheradmin]

In addition to the issues mentioned by @C. B. Zeller, (the control group / affiliated service group / related employer group issue is so common!) some what I see:

• Disregard for deposit timing, both for deferrals, and
• Over contributions thinking it can count towards a future year even though the deposit occurs this year. - think throwing in an extra $100,000 because they have the cash available and want it to grow
• As well as disregard for limits, such as depositing up to what they think is the maximum, even though the W-2 compensation they have paid themselves(or a covered spouse) is substantially lower. 
• Investments in unusual assets with no additional compliance such as an independent appraisal for valuation
• Assets/accounts titled to the business rather than the plan name when they were intended to be for the plan 
• Starting more than one plan every time they get a new account or advisor. Or thinking they have more than one plan when really a new doc with a new account might be a restatement of the older document, but they don't realize it 
• Compensation not being eligible - thinking that profit and loss is enough, and not having earned income, but still making contributions
• Failure to make any contributions - for 5, 10+ years(sometimes nothing beyond the first year) at that point the plan isn't really a plan and should be terminated and closed

[Peter Gulia]

justanotheradmin, thank you for your further list about mistaken assumptions, unobserved rules, and other difficulties.

I’m curious: If a plan covers no employee and is not ERISA-governed, does the Internal Revenue Code constrain how promptly a § 401(k) elective deferral must be paid into the plan’s trust?

Or is it enough that a participant contribution is paid over before the employer files (or is required to file) the employer’s tax return for the year?

(About an only-the-owner plan, I imagine the participant won’t sue her employer for failing promptly to pay over a participant contribution. So, I’m guessing tax law might be the constraint.)

[Bri]

Agreed, Peter - It's the prohibited transaction rules (the business holding onto what should be plan money) that make important the deferral deposit timing in non-Title I plans.

[Peter Gulia]

Bri, thanks. Your thinking is why I ask questions. It would have taken me a while to see the Internal Revenue Code § 4975 prohibited transaction.

Because a § 4975 prohibited transaction does not by itself tax-disqualify a § 401(a) plan’s trust, one might consider also whether there is a § 401(a)(2) exclusive-benefit defect.

[Bri]

Speaking of thinking, Peter - that's a great thought of yours there that *any* late deposit brings questions of 401(a)(2).

Why look for more obscure references of what's gone wrong, when "page one of the 400s" has it right there for you?  🤔

(unless one suggests the undeposited amounts aren't yet plan assets to divert anywhere else)

[jsample]

Not that more is needed, I often come across plan documents not being up to date, no Cycle 3, sometimes no Cycle 2.

I often find these are set-up without a TPA, generally with an investment advisor and accountant.

[ErnieG]

Could not agree more.  However, I believe we are going to see more issues as AI becomes more prevalent with the "do-it-yourselfers".  We've referred a handful of cases over the past several months to ERISA Attorney's for correction of a host of issues when the "do-it-yourselfer", or their other "professional advisor", realizes there is an issue.

[Peter Gulia]

Not every nonexempt prohibited transaction, even about participant contributions, results in a failure of § 401(a)(2)’s exclusive-benefit condition.

In practical enforcement, the IRS might not pursue a tax disqualification unless the missing or late contributions were substantial, systemic, or recurring. The IRS looks for situations that suggest an employer lacks a real intent to obey the plan documents’ exclusive-benefit provision.

* * * * * 

If an investment salesperson suggested her customer set up a retirement plan, the plan was not correctly established or was not correctly maintained, and losses or expenses result from a tax-compliance failure, does a plan sponsor ask the investment salesperson to pay or reimburse those expenses?

[PensionPete]

As stated already, I think the majority of "solo 401ks" are created without a TPA, but via a financial advisor or CPA.  Only after issues arise, all those already mentioned, does a TPA/Attorney get involved.  Recently, I had one referred by a CPA where his client thought he had a SEP not a 401k plan, for over 15 years.  Another was set up without anyone asking the ownership/controlled group question.  I think these plans are more likely to have alternative investments which can bring more unknown complications. They seem simple to market and run, until they are not. 

[friedliver]

I will say, while most advisors will just use the plan documents provided by a custodian (Altruist/Charles Schwab) without even reading them, there is a growing group, especially in XYPN, that will typically bring in providers like mysolo401k.

 

But I mostly see advisors using the custodian's plan docs, and the advisor takes on a pseudo admin role without having the knowledge to step into those shoes.