We all know that the IRS is responsible for collecting federal taxes; however, some of us may not be aware that if you do not pay your federal taxes the IRS may be able to levy (confiscate) your retirement funds including Solo 401k after satisfying timing and notice requirements.
The general rule or understanding in the retirement account industry regarding the IRS position on tax levies against retirement accounts is that a plan is not required to honor an IRS levy until the retirement account participant becomes eligible for a distribution from the plan (e.g., Self-Directed Solo 401k plan).
This is supported by the following internal memorandums issued by the IRS whereby the IRS recognized the plan’s right to delay the distribution when the participant is not eligible to legally make/begin taking distributions.
- FSA 199930039 (Field Service Advice memorandum) and
- CCA 199936042 (Chief Counsel Advice memorandum)
The levy still attaches: The fact that the plan is not required to proceed with the levy until the Self-Directed Solo 401k participant is eligible to make a distribution does not mean that the levy is invalid before the plan funds are eligible for distribution. Instead, pursuant to IRC 6331 the levy sticks until distributions from the plan can legally commence. See Rev. Rul. 55-210, 1955-1 C.B. 544, which details the tax lien attaches to right to receive future benefits and that just one notice of levy is required to be served to have access to distributions from the plan (for example, Solo 401k) once it qualifies for distribution.