Solo 401k Basics Series: What does a Document Sponsor do?

A Solo 401k document provider is a vital piece to the puzzle in controlling your own retirement funds. It’s exciting to be in charge of your financial future. And with a self-directed retirement plan you can do just that. Getting checkbook control means you’re in charge of when, how, and where you invest your funds.

However, with a self-directed Solo 401k plan, having properly prepared and maintained documents is critical. While you technically can write your own 401k plan, it’s generally a terrible idea! A Solo 401k plan and trust is more 300 pages and needs to be updated at least annually, or more.

The easiest solution to keeping a set of compliant plan documents is to work with an experienced company who can help. In other words, work with a pre-approved Solo 401k document provider.

Typically, your document provider and plan sponsor will be the same company. Use a trusted document provider with experience who can support you, answer questions, and keep your 401k documents up to date.

IRS Compliance

IRS publication 560 outlines the rules for employer-sponsored retirement plans. When you write your own plan, the IRS considers it “individually designed”. While this is technically OK, it’s a risky move. With an individually designed plan, you’re not in constant contact with the IRS. Therefore, you could miss critical IRS updates, amendments, and/or restatements.

If you miss a required amendment or restatement, your plan could be out of compliance. If your plan is out of compliance, all your assets and investments in the retirement account could be considered taxably distributed. Avoid a huge tax penalty and work with a trusted approved Solo 401k document provider.

When you work with an IRS-approved Solo 401k document provider, you can rest easy knowing your documents are in compliance. It’s your document providers job to get updates from the IRS and keep your plan documents current. Your Solo 401k document provider will include an IRS Opinion Letter as a part of your 401k plan documents. This important letter proves the qualified status of your pre-approved plan.

From IRS Publication 560: “Generally, unless you write your own plan, the financial institution that provided your plan will take the continuing responsibility for meeting qualification rules that are later changed.” (Source) In other words, the document provider will shoulder the responsibility for keeping everything up to date and qualified.

Update Documents

Your document provider works with the IRS on an ongoing basis to receive required amendments, updates, or restatements. There is no central set of files for Solo 401k document providers to download the amendments. Instead, each document provider writes their own amendments to include in your plan. In other words, each plan provider will have slightly different wording for the plan.

This is another reason it’s important to work with an IRS pre-approved document sponsor. Because the document sponsor is is constant contact with the IRS, this assures you’ll get the most up to date documents with IRS-approved language.

If you don’t get updated documents, your plan might be out of compliance. Always follow the instructions of your document provider to keep your plan current, including updating your information for any restatements.

Plan Sponsor Responsibilities

As per Internal Revenue Procedure 2017-41, the IRS requires that the Solo 401k document provider:

• Maintain, and be prepared to provide to the IRS when requested, a listing of the name, current business address, and Federal Employer Identification Number of each employer that has adopted the Sponsor’s plan; and
• Notify adopting employers of changes to the pre-approved document during the preceding 12 months; of any intent to abandon the pre-approved document; or of necessary steps that are required to be taken to continue to rely on the opinion or advisory letter.

In other words, your document sponsor keeps a list of current and active clients. If the IRS ever requests the list from the document provider, they have to supply it. Pay attention to notices from your document sponsor that require you to restate or amend your documents. And always pay your annual maintenance fees to your document provider on time and make sure you’re on the “active” client’s list!

Ongoing Support & Training

The most trusted Solo 401k document providers happily provide ongoing support and training to their account holders. These trainings include help with investments, best practices on good record keeping, guidance for titling assets, and filling out required forms for plan maintenance.

Additionally, the right Solo 401k document provider is there to support you in getting the most out of your plan. Excellent customer support and help walking you through the documents will empower you so you can use the Solo 401k to continue to build your retirement nest egg.