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Welcome to the Retirement Learning Center’s (RLC’s) Case of the Week. Our ERISA consultants regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, Social Security and Medicare. This is where we highlight the most relevant topics affecting your business. A recent call with a financial advisor in Illinois is representative of a common question on sole proprietors and prohibited transactions.
While owner-only 401(k) plans are not subject to Title I of ERISA, they remain subject to Title II of ERISA, which coordinates the IRS prohibited transaction rules under Internal Revenue Code Section (IRC §) 4975. Therefore, if your client (as a “disqualified person” under IRC §4975(e)(2)(E)) was involved in a PT under IRC §4975(c) with no exemption, they may still be liable for penalties under the tax code. PTs are reported to the IRS using IRS Form 5330.
ERISA (the Employee Retirement Income Security Act of 1974) applies to employee benefit plans, including retirement plans, to protect participant and beneficiary rights, and consists of four “titles:”
Title I: Protection of Employee Benefit Rights
Title II: Amendments to the IRC and requirements for federal income tax deferrals and deductions
Title III: Jurisdiction and Administration
Title IV: Plan Termination Insurance (i.e., PBGC)
Solo 401(k) plans are not subject to Title I of ERISA if there are no common-law employees. If a 401(k) plan only covers a business owner (i.e., sole proprietor, partners, and their spouses), it is exempt from ERISA Title I under the “owner-only” exemption. “A so-called “Keogh” or “H.R. 10” plan under which only partners or only a sole proprietor are participants covered under the plan will not be covered under title I,” [DOL Advisory Opinion 99-04A and DOL Reg. § 2510.3-3(b)].
But owner-only plans may be covered by other titles of ERISA, as the following chart summarizes.
| ERISA Titles | Applies to One-Participant Plans? | Explanation | Source |
| Title I – Protection of Employee Rights | N/A | One-participant plans are exempt from Title I because they cover only the business owner (and spouse), not "employees" as defined under ERISA. | 29 CFR § 2510.3-3(b), DOL Advisory Opinion 99-04A |
| Title II – Amendments to the Internal Revenue Code | This includes tax qualification rules (e.g., nondiscrimination, contribution limits, prohibited transactions). Applies because ERISA incorporates provisions of the Internal Revenue Code. | DOL Advisory Opinion 99-04A, IRC §401, IRC§ 4975 | |
| Title III – Coordination and Enforcement | Limited | Title III governs interagency coordination (e.g., DOL and IRS). Generally, not directly relevant to plan sponsors but still legally in place. | ERISA Title III Summary |
| Title IV – PBGC Plan Termination Insurance | N/A | Applies only to defined benefit plans, and only if they cover common-law employees. Solo 401(k)s are defined-contribution plans and not covered. | PBGC Coverage Rules, ERISA § 4021 |
Consequently, even though a solo 401(k) is exempt from Title I of ERISA, it is still subject to Title II of ERISA, which contains the standards retirement plans must meet to qualify for favorable tax treatment under the IRC. Title II of ERISA added IRC §4975 to the IRC.
Noncompliance with the tax qualification requirements of ERISA, which include PTs (ERISA Title II, Subtitle A, Part 5, Section 2003), may result in disqualification of a plan and/or other penalties. A prohibited transaction is any improper use of the retirement plan by a disqualified person under IRC §4975(c)(1). Examples of PTs include these:
Using plan assets for personal benefit,
Borrowing from the plan outside of permitted loan rules, and/or
Selling property to or buying property from the plan.
Conclusion
Even though a solo 401(k) is exempt from Title I of ERISA, it is still subject to Title II of ERISA, which contains the standards retirement plans must meet to qualify for favorable tax treatment, including the rules for PTs.