I attended a small business conference which included a presentation on 401k plans. The presenter stated that in order to keep a 401k plan in compliance “substantial and recurring” contributions must be made to the plan. How does this requirement apply to my Solo 401k? Am I required to contribute to the plan every year?
First, the IRS clearly states that the employer does not need to contribute to a 401k plan every year.
For certain employers, if contributions are not made for several years it can create a presumption that the plan has been discontinued. For example, if a business offers a 401k plan in which non-owner employees participate and are not 100% vested, this issue is one of several different factors that the IRS considers in determining whether a plan is discontinued (e.g. if the employer has been profitable but has not made any profit-sharing contributions in 3 of the last 5 years).
With regards to Solo 401k plans:
- The IRS’s own Internal Revenue Manual states that this is not an issue if plan participants are fully vested at all times.
- Since all participants in your 401k are 100% fully vested (i.e. you), this is not an issue per the IRS guidance.