Reader Pushed Back on My Solo 401(k) Post — And He Was Right to Do It

The Entrepreneur's Life

Reader Pushed Back on My Solo 401(k) Post — And He Was Right to Do It

One of the things I love most about publishing this blog every week is that the people reading it are often smarter about specific pieces of this than I am. Not because I don't know the material — I do — but because there is a kind of knowledge that only comes from living inside a situation for years. From making the mistakes yourself, from finding the landmines the hard way, from having the IRS letter show up in your mailbox.

Last Monday I published a post about the retirement math every 1099 physician needs to see — specifically, why a solo 401(k) outperforms a SEP IRA at physician income levels, and by how much. I stand behind every number in that post. But within hours of sending it, I had a reply sitting in my inbox from an internal medicine doctor in California who had been running solo 401(k) plans for years. He read the post, agreed with the core argument, and then added five points I had not covered.

He asked me not to use his name. I will call him Dr. R.

I wrote back immediately. I told him these were great insights based on real-world experience and asked if I could publish them on the blog. He said yes.

So that is what this post is. A reader response — and an honest expansion of something I got mostly right but not completely right. That distinction matters, because one of Dr. R's points involves a compliance requirement that carries penalties so severe they could wipe out years of tax savings in a single filing mistake. I want every physician reading this to understand it before they open a solo 401(k) account.

What Dr. R Got Right That I Did Not Say

I covered the contribution math in Monday's post — the $72,000 ceiling, the salary deferral and profit-sharing split, the $98,000 gap in required compensation between the solo 401(k) and the SEP IRA. What I did not cover was the operational experience of actually running one of these accounts. Dr. R filled that gap.

Here are his five points, in his words and mine.

Setup is simpler and cheaper than most physicians assume. Dr. R holds two individual 401(k) plans at two separate large retail financial institutions — his words: "think Fidelity, Vanguard, Schwab" — and paid zero fees to set up or maintain either one. No setup fee. No annual maintenance. The enrollment paperwork is standardized and the institutions walk you through it. They do this for free because they know the assets will stay invested with them for decades. If you have been putting off opening a solo 401(k) because you assumed it would be expensive and complicated to establish, Dr. R's experience suggests otherwise. The cost obstacle is smaller than the benefit calculation warrants.

You are the plan administrator. The financial institution serves as custodian, but the physician participant is considered the plan administrator under IRS rules. Dr. R notes that the custodians do a good job prompting updates to plan documents and helping maintain regulatory compliance. But the responsibility sits with you. This is worth knowing before you open the account, not after.

You do not need a corporate entity to open a solo 401(k). This one surprises a lot of physicians. Participation in an individual 401(k) does not require a PLLC or PC. It does require an EIN number from the IRS, which is free and available through a simple online application. If you are doing 1099 work and have not yet formed your entity but want to start sheltering income now, the solo 401(k) is available to you. The entity question is still worth resolving — the S-Corp structure unlocks additional advantages that the EIN-only approach does not — but the retirement account does not have to wait.

Solo 401(k) funds carry superior lawsuit and bankruptcy protection. As a federally qualified retirement plan, a solo 401(k) benefits from stronger legal protection than a SEP IRA in the event of a lawsuit or bankruptcy filing. Dr. R specifically calls out colleagues in high-liability states without strong tort reform as the physicians who should pay the most attention to this point. For physicians practicing in states where malpractice exposure is a real concern, the protection layer of the solo 401(k) is an additional reason to prefer it over the SEP — independent of the contribution math.

The One That Stopped Me Cold

And then there is point five. I am going to let this one breathe, because it deserves more than a bullet point.

Form 5500-EZ: The Filing Requirement Most Physicians Don't Know About Until It's Too Late

Unlike a SEP IRA, a solo 401(k) carries a mandatory annual filing requirement with the IRS or Department of Labor: Form 5500-EZ. This form must be filed every year once your plan assets cross $250,000. The IRS treats this requirement with a seriousness that most individual physicians are completely unprepared for — because the penalty structure was designed to punish large corporate plans, not solo doctors.

Dr. R's words: "The penalties are draconian because, under the new laws and regulations, the IRS views an individual 401(k) as a small business retirement plan, which legally it is, and the size of the penalty is set at a level that would punish a corporate organization — Microsoft, Amazon, ExxonMobil — not just an individual."

He nearly found out the hard way. A few years ago he almost faced a $40,000 penalty because the IRS believed he had filed late. He had not. He had simply mailed Form 5500-EZ to the wrong IRS address. Once he was able to prove the documents had been sent on time, the penalties were waived. But the process of proving it was not a minor inconvenience. It was a serious matter that required documentation and follow-through to resolve.

I want to be clear about what this means practically. If you open a solo 401(k), fund it well — as you should — and your plan assets grow past $250,000, you have a filing obligation that will not go away until the plan is terminated. Missing it, or mailing to the wrong address, or assuming someone else is handling it when they are not, can result in penalties that dwarf the tax savings you worked years to accumulate.

Your CPA or TPA should be tracking this for you. If they are not proactively raising it, ask them directly: who is responsible for filing Form 5500-EZ for my solo 401(k), and how do we confirm it is submitted to the correct address on time, every year? Get that answer in writing. The IRS will not accept "I thought someone else was handling it" as a defense.

Why This Kind of Feedback Matters

I am sharing this post not because I got Monday's piece wrong, but because real-world experience always adds texture that a framework post cannot fully capture. Dr. R has been running these accounts for years. He found the landmine himself, nearly stepped on it, and managed to avoid the blast. His instinct to share that with other physicians is exactly the kind of generosity that makes a community like PEA worth belonging to.

He also closed his email with something I have been thinking about since I read it. He said his dream is to eventually return to Texas and negotiate a full-time, direct-contract 1099 arrangement with a supportive organization in an area with strong demand for internal medicine and hospital medicine. He acknowledged it might be hard to pull off but said he plans to try again.

I believe he will. The physicians who know this material at the depth he does — the ones who understand not just the contribution math but the compliance requirements, the liability protections, the administrative mechanics — are exactly the ones who negotiate the best arrangements. Because they walk into those conversations knowing what they are worth and what they need. That knowledge is not accidental. It is built over time, post by post, plan by plan, close call by close call.

That is what the entrepreneurial life actually looks like. Not a clean case study. A real physician, real accounts, a nearly $40,000 mistake that wasn't — and the generosity to write it all down so someone else doesn't have to find out the hard way.

Is This Deductible?

Solo 401(k) Third-Party Administrator (TPA) Fees and Form 5500-EZ Preparation Costs

Deductible — with conditions

The scenario: You have a solo 401(k) through your S-Corp. You pay an annual TPA administration fee of roughly $1,015 and your accountant charges a separate fee to prepare and file Form 5500-EZ each year. Are these costs deductible?

The ruling: Yes — when paid from your business entity. TPA fees and plan administration costs are ordinary and necessary business expenses under IRS rules when your S-Corp or professional corporation pays them directly. Your accountant's fee for preparing Form 5500-EZ is similarly deductible as a professional service expense. At a 30 percent marginal rate, a $1,015 annual TPA fee produces roughly $305 in direct tax savings — on top of the far larger benefit from the contributions themselves. Pay these from your business account, not your personal account, and make sure your bookkeeper is categorizing them correctly. They are easy to miss and entirely legitimate.

One caution: If your plan has a third-party administrator who handles the 5500-EZ filing on your behalf, confirm in writing that they are filing to the correct IRS address and that you receive a copy of the filed form every year. As Dr. R's experience makes clear, the administrative responsibility does not fully transfer just because you have hired someone to help. Verify. Every year.

Want the full picture on tax deductions available inside your micro-corporation? Grab the free S-Corp Advantage eBook — included with PEA Explorer membership simplimd.com/PEAMembership

Join the movement

The physicians who build real wealth as independent contractors are the ones who know this material cold — the contribution math, the compliance requirements, the filing deadlines, the liability protections. That knowledge does not come from a single post. It comes from a community of people who have been in the field and are willing to share what they found there.

That is what PEA is. Physicians learning from each other, with the frameworks and tools to act on what they learn.

Join PEA Explorer at $99/year and get access to the full eBook library, including the S-Corp Advantage guide and the solo 401(k) vs. SEP IRA comparison resource. The community is where the real education happens.

And if you want to sit down and work through your retirement account strategy, S-Corp salary calibration, and annual compliance checklist together, a one-on-one session is the fastest way to get there. Book a $500 Business Strategy Session and let's map your plan before December — because the solo 401(k) establishment deadline will not wait for a convenient moment.