Since different expense types apply to Solo 401k (also known as Individual 401k or Solo K), including the plan’s underlying investments (e.g., real estate), each expense type must be analyzed to determine whether the applicable expense requires payment with self-employed revenue or Solo 401k funds.
Solo 401k or Self-Directed Expenses Break Down
Identifiable costs–costs that can be anticipated in the course of plan administration and include the following:
- Plan administration
- Annual document maintenance fees
- Legal compliance
Who pays Solo 401k plan’s identifiable costs?
Identifiable fees may be paid with self-employed revenue, Solo 401k plan assets or by and from both. However, if paid from the Solo 401k plan assets, the expenses deplete your tax deferred funds that could otherwise have been compounding on a tax deferred basis
Performance costs–costs that are unpredictable (i.e., not identifiable up front) such as the following:
- Additional legal costs needed to avoid plan disqualification and various penalties for noncompliance.
- Operational defects
Who pays Solo 401k plan’s performance costs?
The self-employed typically pays costs related to legal compliance with self-employment revenue.
ERISA’s view on the use of plans assets to pay administrative expenses
ERISA expressly allows plan assets to be used to pay administrative expenses. [ ERISA 403, ERISA 404, 29 U.S.C. 1103, 1104, (1974) ] The payment of reasonable administrative expenses from plan assets is an exception to the prohibited transaction rules. [ ERISA 408 (b)(2), 29 U.S.C. 1108 (b)(2) (1974) ]
Advisory Opinion 2001-01A: This guidance contains illustrations to help clarify settler vs. plan expenses
Can an employer reimburse a plan for expenses paid by the plan?
Reimbursement by employer/self-employed of expenses that were previously paid by Solo 401k plan will be considered an additional contribution to the plan. [ Priv. Ltr Ruls. 9124034, 9124035, 9124036, 9124037 ]
Who pays fees/expenses in connection with Solo 401k alternative investments (e.g., real estate)?
Fees stemming from real estate investment require payment with Solo 401k funds, not personal funds.
Real estate investment expenses include:
- Property taxes
- Miscellaneous expenses such as HOA dues and repairs