Do I Need a Third Party Administrator for the Solo 401k?

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A Solo 401k plan is surprisingly easy to administer. With the Solo 401k plan by Nabers Group, you do not need a third party administrator. In fact, you are allowed to act as your own administrator. Read on to learn about the roles and duties of a 401k plan administrator and how you can make it work for your retirement plan.

What is a 401k Plan Administrator?

An administrator is the individual or entity who handles the administration of an employer-sponsored plan like the 401k. The 401k administrator is often hired by the 401k plan sponsor to handle the day to day activities and reporting of the 401k plan.

With a Solo 401k plan, your business it the plan sponsor. Therefore, your business can choose who will be the Solo 401k plan administrator. To keep record-keeping clean and easy, and to cut the fat of extra costs, most Solo 401k accountholders will act as their own Solo 401k plan administrator.

A 401k plan administrator will often handle the plan contributions, distributions, and other aspects of plan paperwork. This leaves the trustee to handle the investments. With the Solo 401k plan, it is common for the same person (you) to act as 401k administrator and 401k trustee. 

What Are the Responsibilities of a 401k Plan Administrator?

Record-keeping: The 401k plan administrator must keep track of all participant accounts and any funds related to those participants. This is important because in the case of an audit, it’s important to account for all funds that came in or went out of the Solo 401k plan, including rollovers, contributions, distributions, participant loans, investment gains, investment losses, etc.

Our recommendation is to work with your CPA or tax professional to ensure the “books” of your Solo 401k are accurately kept. You can also use accounting software such as QuickBooks, Freshbooks, or even an excel spreadsehet. The key here is excellent, squeaky clean records.

If your Solo 401k plan includes a Roth sub-account (standard with all Nabers Group Solo 401ks) – you’ll want to ensure the books are clean for both Roth and pre-tax funds. As these are separate tax classes, most Nabers Group Solo 401k accountholders choose to keep their Roth and pre-tax funds separate. On a practical level, this usually means maintaining both a Roth and pre-tax bank account. The bank account is in the same name, and under the same tax ID number as there is only one 401k trust, but keeping bank accounts separate can help to keep record keeping an easier task. 

Keep a neat record of your contributions, and notate clearly which contributions are Roth (after-tax) and which are pre-tax contributions, and therefore tax-deductible.

Some of our accountholders choose even to maintain separate bank accounts for spouses, as each are participants of the Solo 401k plan. While it is possible to keep one bank account for both spouses, the record keeping becomes especially important here. For example, if Sally Doe rolled in $127,305 and her husband John rolled in $203,099 – they would need to keep a distinct record of who rolled in what. This way, if the participants enter into an investment together, they know exactly who put in what amount/percentage of the investment. In other words, the funds are allowed to be maintained together, but separate bookkeeping and record keeping for each “participant” (in this case, each spouse) should be maintained. 

Investments: As your own 401k plan administrator, it is your responsibility to handle the investments for your 401k plan. Record-keeping extends to your investments, and the details of when each purchase was made, how much was paid in by each participant, details of income (e.g. rents from real estate owned by the 401k) and expenses must be tracked by the administrator. Remember your personal and business funds must always remain separate from your 401k funds. You are not allowed to fund or supplement any investment owned by the 401k with personal funds. When you sign for investments owned by the 401k, you are signing as the trustee. All investments should be titled in the name of your 401k trust, using the special trust tax ID number the Nabers Group EIN team obtains for you upon preparing your 401k documents.

As your own plan administrator and trustee, it is also your responsibility to ensure your Solo 401k plan does not engage in Prohibited Transactions. The Nabers Group Prohibited Transaction Checker™ can make this a breeze and is an excellent first step for checking all your transactions for any red flags. After you use the PT Checker™, check with your CPA or legal counsel if you have any questions as to the compliance of your investment. 

Reporting: The plan administrator is responsible for all reporting related to the Solo 401k. As the Solo 401k is a Qualified Retirement Plan (QRP), there is no tax return. 

Once you reach $250,000 in cumulative plan value, you must file information-form 5500-EZ. You can calculate your cumulative plan value by adding up all the cash and assets owned by your Solo 401k plan. Form 5500-EZ is simple and straightforward, and the Nabers Group help team releases updated guides and trainings each year to make completing the form a breeze. We recommend you work with your CPA to complete the form and with the help of our guides, most CPAs and accountholders can complete form 5500-EZ in 10 minutes or less. 

Helpful Hints for the Solo 401k Plan Administrator

As your own Solo 401k plan administrator, you’ll want to ask yourself the following:

  • Are your plan documents up to date? If you are a Nabers Group Solo 401k customer, this is automatically handled for you! Our one-of-a-kind software will push document updates to you as soon as our attorneys have approved them so your plan documents are always up to date! If there’s ever an amendment or restatement that requires your signatures or inputting of new information, we’ll contact you in any way necessary to ensure we get the appropriate information so your documents remain compliant.
  • Where are the 401k funds? You’ll want to setup a bank or brokerage account in the name of the 401k trust (using the trust tax ID number we obtain for you upon plan setup) to house your Solo 401k funds.
  • Have you accounted for any incoming rollovers? It’s important to keep great records of each participant’s funds (typically the participants of a Solo 401k plan will be you and your spouse). If you and your spouse rolled in any funds into the Solo 401k plan, you’ll want to document that as part of your 401k plan records and tally those rollover funds as part of your 401k plan’s cumulative value. Remember to keep track if the incoming rollovers were traditional (coming from a 401k, 403b, TSP, defined benefit plan, traditional IRA, etc) or Roth (coming from another Roth 401k plan).
  • Have you accounted for any contributions? Just like keeping track of rollovers, you must keep track of new contributions you make to the Solo 401k. This includes keeping track of contributions for all participants, and documenting whether these contributions are traditional (pre-tax) or Roth. Remember that a traditional 401k contribution is generally tax-deductible, so keep track of your total contributions for the year so your CPA can claim those deductions on your tax return! 

    Note: Need help calculating your Solo 401k contributions? Check our our free Solo 401k contribution calculator here.
  • Are your investments recorded? Have you made any investments with your Solo 401k funds? Your responsibility is to keep track of where and when the 401k funds were invested.
  • Are any investment gains and losses also recorded? If you and your spouse are each participating in the Solo 401k plan, you’ll want to keep records of each of your “sub-accounts”, even if the funds are in one bank account. It’s critical you keep clean records of how much each participant has in the 401k, how much each participant contributed, rolled in, and how much each participant’s individual account had in gains or losses from investments connected to the Solo 401k.
  • Are you keeping track of any outstanding loans and their repayments? As your own plan administrator, it’s your job to keep track of paperwork, including loan origination, and loan repayments. 
  • Do you need to file form 5500-EZ? If your Solo 401k plan had $250,000 or more in cumulative value on December 31st of last year, you must file information form 5500-EZ. If your total plan value was less than $250,000  – form 5500-EZ may not apply to you. You must file form 5500-EZ if you shut down and terminated your Solo 401k plan last year, even if your plan assets were under $250,000.

Because you are allowed to be your own plan administrator with the Solo 401k plan, there is no need for the expense or bureaucratic burden of an outside administrator. By following the simple record keeping best practices, handling your investments wisely and with respect to compliance, and staying on top of reporting for your plan, being your own 401k administrator with a Solo 401k plan can afford you the freedom of total self-direction and checkbook control in your retirement funds. 

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