Clients close their Solo 401(k) for a variety of reasons. The most common is the closure of the sponsoring business or a change in employment status that eliminates plan eligibility. In some cases, a client simply decides to consolidate accounts or simplify their financial picture. Whatever the reason, the process follows a defined sequence.
Before proceeding, consider whether termination is the right choice. If you are closing one business but opening another that would qualify to sponsor a Solo 401(k), it may be possible to amend the plan to name a successor employer rather than terminate it. If your situation is in flux, contact support before taking action.
Sell or otherwise convert every investment held in the plan to cash. All proceeds should be deposited into the plan's bank or brokerage account. If your plan holds real estate, privately held securities, or other assets that cannot be easily converted to cash, contact support before proceeding.
Formally terminate the plan by adopting a written resolution recording the decision to terminate. A template is available in your plan documents. The date of this resolution is the official termination date of the plan. It is this date that ends the plan year and starts the clock on your Form 5500-EZ filing deadline.
With the plan formally terminated, all assets must be distributed as soon as administratively feasible after the termination date. You may take a direct distribution to yourself or roll the funds over to another qualified plan. The tax treatment of a distribution depends on whether your account holds tax-deferred or Roth funds. A rollover preserves the tax treatment of your savings and avoids penalties.
Once all assets have been distributed or rolled over and the account balances reach zero, close any bank or brokerage accounts held in the name of the plan.
A final Form 5500-EZ must be filed regardless of plan value, even if the plan assets were below the $250,000 annual filing threshold. Check box A(3) "Final Return" on the form to indicate this is the plan's last filing.
The filing deadline is the last day of the seventh month following the end of the final plan year. The plan year ends on the last day of the month in which the plan is terminated. For example, if the plan terminates in September, the final Form 5500-EZ is due by the end of April of the following year.
Important: the penalty for failure to file is $250 per day, up to $150,000 per plan year. Do not skip this step. If you need assistance, your CPA should be familiar with the 5500-EZ filing.
Keep all plan records, including the plan document, termination resolution, bank and brokerage statements, investment records, tax filings, and Form 5500-EZ returns, for a minimum of seven years, or longer if recommended by your tax counsel.
This information is provided for educational purposes only and should not be interpreted as tax, legal, or investment advice. Readers are encouraged to consult a qualified professional who can offer guidance based on their personal situation.