Solo 401k Prohibited Transactions: Furnishing of Goods, Services, or Facilities

The Solo 401k plan may not furnish goods, services or facilities to a disqualified person (e.g., your son, father, spouse), nor may the disqualified person furnish goods, services or facilities to the Solo 401k plan. See ERISA 406(a)(1)(C).

Exemption exists for reasonable compensation for reasonable services. ERISA 408(b)(2) provides relief from the prohibited transaction rules for service contracts or arrangements between a Solo 401k plan and a disqualified person/party-in-interest if:

(1) The contract or arrangement is reasonable

(2)the services are necessary for the establishment or operation of the Solo 401k plan, and

(3)no more than reasonable compensation is paid for the services.

This exemption is commonly referred to as the ERISA 408(b)(2) exemption.

See DOL Reg. 2550.408b-2 and Treas. Reg. 54.4975-6 which contain additional rules about this exemption.

Because the DOL has primary regulatory authority with all prohibited transaction issues, with the exception of collecting excise taxes under IRC 4975, it is through this exemption that a service provider (e.g., Solo 401k administrator) may receive payment for services directly from Solo 401k plan assets. “Services” for this purpose includes the provision of goods or facilities (e.g., leasing of space by the Solo 401k plan).

What’s considered reasonable compensation? Reasonable compensation is determined on facts and circumstances. See Treas. Reg. 54.4975-6(e) which discusses payment of compensation. Also, Treas. Reg. 1.162-7 discusses excessive compensation.

Important: Self Dealing: The exemption for reasonable compensation does not apply to self-dealing transactions under 4975(c)(1)(E) and (F). This is supported by IRS and DOL. Treas. Reg. 54.4975-6(a)(5)(i) and DOL Reg. 2550.408b-2(e)

About Mark Nolan

Each day I speak with energetic entrepreneurs looking to take the plunge into a new venture and small business owners eager to take control of their retirement savings. I am passionate about helping others find their financial independence. Having worked for over 20 years with some of the top retirement account custodian and insurance companies I have a deep and extensive knowledge of the complexities of self-directed 401ks and IRAs as well as retirement plan regulations. Learn more about Mark Nolan and My Solo 401k Financial >>