Almost like a person, your 401(k) plan has its own “life” that can best be described as the plan’s establishment, operation and termination. For most individuals who are the Trustee of this type of plan, the plan begins and ends. Between these two dates is the operation of the plan. Understandably, the establishment, operation and termination of the plan must adhere to various IRS and DOL regulations.
As compared to the multi-participant 401(k) plan, the individual, self-administered 401(k) plan has significantly less compliance reporting requirements. These requirements make an individual 401(k) plan ideal for the self-employed individual in that the plan is much easier to administer and operate than the multi-participant plan.
Establishment – The individual, self-directed 401(k) plan, like any 401(k) plan, must be established in compliance with IRS and DOL requirements. The primary tool involved in establishing the plan is the plan’s operating documents (e.g., Adoption Agreement, Basic Plan Document) accompanied with an IRS satisfactory opinion letter confirming that the plan documents meet the IRS’ requirements for a 401(k) plan. These documents must be written to be in operational compliance for the plan and the IRS must approve the plan’s documents.
Further, even with the proper documents in place, the plan and its assets must be appropriately cared for by establishing account(s) to hold and invest the plan’s assets and invest these assets in compliance with tax law. While the account for the 401(k) can be at any financial institution that will accept the plan’s funds, it is the responsibility of the plan’s Trustee to ensure that the assets are properly protected and invested.
Operation – The operation of the plan is of vital importance. While it is exciting to control the investments of the plan, the 401(k) Trustee assumes the responsibility of operating the plan in full compliance with IRS and DOL regulations.
Aspects of the plan that need to be addressed include: 401(k) plan documents, amendment, updating and re-statement of plan documents, plan investments, plan transfers and rollovers, employee and employer contributions, adherence to IRS and DOL Prohibited Transactions, plan tax reporting and plan termination.
Termination – For most individuals, the plan will be terminated at some future date. Like any “living” entity, the plan will be terminated once the business discontinues its business activities. It is important that the Trustee understands this and properly terminates the plan when needed.