Jump to content

Record Keeping Requirements for Solo 401(k)


matth100
 Share

Recommended Posts

Hi Folks,

I've a couple of small business clients that need a TPA but not really a TPA fee. The Solo 401(k) balances are small, perhaps $10K-$20K or so.

I was wondering if we could handle the record keeping for these smaller cases in house, and if so if there we some guidelines with regard to 'how' records should be kept?

The only glaring thing I see is the split between EE/ER contributions when the custodian doesn't track that directly, are there other things that need to be recorded on smaller plans like this, and are there any rules on how things should be recorded?

For example, would a copy of payslips showing the contributions suffice?

Lastly, what qualification or course would prepare someone for scenarios like this if professional training is recommended?

Thanks!

Matt

Link to comment
Share on other sites

I've a couple of small business clients that need a TPA but not really a TPA fee.

Point them to the code and regulations and instructions to form 5500.

Also let them know about the LRMs so they can make sure the plan document is current and in compliance.

Link to comment
Share on other sites

I've a couple of small business clients that need a TPA but not really a TPA fee.

Point them to the code and regulations and instructions to form 5500.

Also let them know about the LRMs so they can make sure the plan document is current and in compliance.

I had looked into this previously and was under the impression that form 5500 was not required until assets exceeded $250,000. Further to which, since they are Solo 401(k) plans they could file form 5500-EZ.

My question is for the next decade or so where the plans will remain under the $250,000 threshold, what records should be kept on an annual basis?

Link to comment
Share on other sites

The problem with "solo" 401(k)s is that they are sold as simple products, but as rcline notes, they are in fact a full-blown qualified plan. "Solo" is a marketing term, not a definition.

We handle some "one-man" plans (right there, things get complicated because these plans can cover more than one person) and we apply our regular checklist. Some things matter, some don't, and the fact that a 5500 is not required is actually a somewhat trivial relief, because by the time we get done with our testing and compliance work, the 5500 for most plans, at least SFs, is almost an afterthought; preparing it or not is a matter of a few minutes' time.

What I'm saying, and I think what the other posters have implied, is that there is no minimum/easy threshold or shortcut for providing services for just these plans. You really need to know at least something about controlled groups, eligibility requirements, and any and all aspects of retirement plan testing and compliance. Yes they are easier than plans with other participants but without having such knowledge and experience and systems in place I think you are asking for trouble. (For starters, a 5500 is required in the final year of such a plan; who is going to prepare it?)

Ed Snyder

Link to comment
Share on other sites

Besides tracking the employee vs. employer money types, you would need to track pre-tax vs. Roth. If the plan allows hardship withdrawals, you also have to track the amount of employee contributions vs earnings on them.

Who will be calculating the employer contributions? If the employer is a sole proprietor, that is a complex calculation.

Link to comment
Share on other sites

Thanks for the replies folks. To elaborate on my situation:

I have a client who can custody assets within a model/prototype Individual 401(k) plan, the client only earns about $25K per year and we will be putting most of that into the plan.

There isn't really enough left over cash from the relationship to justify a large fee in terms of recording that this was $18K in salary deferral (and maybe a few more $K in employer contributions).

I can file the taxes for this, including the 5500 when needed as I'm an Enrolled Agent, but I don't know a huge amount about the practicalities of recording a plan like this one.

If it were bigger, had multiple people involved, different levels of EE/ER contributions and all that I can see it being a viable candidate for using a full TPA solution, but I just look at these smaller plan situations as one that perhaps we can 'make work' if done correctly.

I'm keen to learn, and am looking at a few qualifications to build up my knowledge, but want to know just for a case like this one how much work/time really exists on a practical, yearly basis?

Link to comment
Share on other sites

At a minimum, you have to track deposits, account for the earnings (per conteibution type) and, and make sure all transactions in the plan were allowable.

While I suggest this be done someone with 401k experience, it doesn't have to be cost prohibitive. My firm does these by the hour (400 minimum) and they rarely go beyond the minimun unless its a "problem client". If that isnt in a clients budget they should probably consider another vehicle for savings...

 

 

Link to comment
Share on other sites

At a minimum, you have to track deposits, account for the earnings (per conteibution type) and, and make sure all transactions in the plan were allowable. While I suggest this be done someone with 401k experience, it doesn't have to be cost prohibitive. My firm does these by the hour (400 minimum) and they rarely go beyond the minimun unless its a "problem client". If that isnt in a clients budget they should probably consider another vehicle for savings...

OK so to track deposits, a payslip shows this, would having a copy of all payslips for the year suffice?

In terms of 'earnings per contribution type' Isn't that impossible since the funds co-mingle when they hit the custodial account? How would you be able to determine what percentage of each was used to buy an underlying investment?

Link to comment
Share on other sites

Matt, that is what TPA software is for and a good reason why plans should be serviced by plan professionals. :)

TPA software sounds interesting, but I'm still not sure it can truly track performance of EE vs ER, or actually if that is necessary.

I'll keep digging.

Link to comment
Share on other sites

"TPA software sounds interesting, but I'm still not sure it can truly track performance of EE vs ER, or actually if that is necessary."

It's borderline insulting when someone comes to a message board focus on 401k PLANS and someone comes in and suggests that the distinguished posters who have been posting for years, and/or have been working exclusively in plan administration for years, somehow don't know what we are talking about. So to make a statement like "I don't believe that a commingled account can be adequately segregated between employer and employee" is basically proving the point to the rest of us who are "in the know" that you are in way over your head. And frankly the biggest mistake you are making is to assume we do not know what we are talking about.

To be honest, segregating the account between employee and employer is quite simple. you can allocate the gains to each source pro rata on a spreadsheet once a year. There, I've answered your direct question.

But that wasn;t our point. Our point is that when the plan is penalized for never executing its PPA restatement, your client will blame you. Or when they take a distribution of their pre-tax account before attaining age 59.5, they are going to blame you for not telling them it was illegal to do so. Or how about if they contribute $18,000 to the Plan by writing a check to the Plan even though there W-2 wage are only $12,000 that year. Again, your fault. How about they take a loan and send you an amortization schedule with annual installments and you don't tell them the loan is a deemed distribution. I can go on and on about all of the things your client will definitely blame on you. But I've bored myself now.

To quote ETA Consulting:

Good luck!

Austin Powers, CPA, QPA, ERPA

Link to comment
Share on other sites

So this might also be insulting - I apologize in advance!

It's borderline insulting when someone comes to a message board focus on 401k PLANS and someone comes in and suggests that the distinguished posters who have been posting for years, and/or have been working exclusively in plan administration for years, somehow don't know what we are talking about.

I absolutely think you guys know what you are talking about - but (apologies if this sounds bad) I also feel that people here are making things sound worst case in order to upsell their services.

So to make a statement like "I don't believe that a commingled account can be adequately segregated between employer and employee" is basically proving the point to the rest of us who are "in the know" that you are in way over your head.

Technically I said:

I'm still not sure it can truly track performance of EE vs ER

To which you addressed as:

To be honest, segregating the account between employee and employer is quite simple. you can allocate the gains to each source pro rata on a spreadsheet once a year

Which does speak to my point that you can't actually track it accurately, so we're in agreement there as you propose Pro Rata allocations. At this point I'm not totally sure why it matters in regard to specific fact patterns I'm working with.

As for the other points:

But that wasn;t our point. Our point is that when the plan is penalized for never executing its PPA restatement, your client will blame you. Or when they take a distribution of their pre-tax account before attaining age 59.5, they are going to blame you for not telling them it was illegal to do so. Or how about if they contribute $18,000 to the Plan by writing a check to the Plan even though there W-2 wage are only $12,000 that year. Again, your fault. How about they take a loan and send you an amortization schedule with annual installments and you don't tell them the loan is a deemed distribution. I can go on and on about all of the things your client will definitely blame on you.

I'd expect the client to blame me for this, regardless of whether there was a TPA involved or not - I think it's my job to explain the pro's and con's of the retirement options they have, and if they messed it up I wouldn't try to pin the blame on a third party for that lack of understanding.

Back to the point, from what I can gather from looking into this, an Individual 401(k) plan with a model plan document from a custodian with no bells or whistles seems pretty straightforward to administer in terms of record keeping. I'd like to know if I'm missing anything on this, but if that is offensive, I apologize and I can just keep on looking.

I do absolutely think that for clients (even Individual 401(k) clients) who have more elaborate needs from their plan, a custom designed plan document and ongoing recordkeeping from a professional TPA is essential and I'm all for it. In fact, I have a few clients that I'll be needing this service for and will gladly pay the market rate.

Thanks everyone again for your insights here.

Link to comment
Share on other sites

Would this all be a moot point if they found a TPA to manage their Individual 401k for a nominal ~$300/year? Peace of mind comes with minimal cost in this case. If it is your opinion that they do not need a TPA then you may be making yourself a fiduciary to the Plan, putting you at great risk if & when something is overlooked.

R. Alexander

Link to comment
Share on other sites

There is a difference in record keeping assets and administering a plan.

Could you easily record keep assets of a "one-man' plan? Probably.

Administering it? That's a different story.

As was mentioned before: who is going to make sure the plan is amended timely? Who is going to make sure the deferral and 415 limits are not violated? What about the deductibility (25% of comp) limit? Are hardships going to be available? Someone has to track contributions vs account balance. Who is going to track vesting? What if something goes amiss? Who is going to make sure it gets corrected properly? Regular paychecks on a W2--who is going to track timing of deposits?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

Link to comment
Share on other sites

For some of these clients, $300 is probably too much.. I know it sounds crazy, but that's the fact of it. For others, $300 or more is fine.

As was mentioned before: who is going to make sure the plan is amended timely? Who is going to make sure the deferral and 415 limits are not violated? What about the deductibility (25% of comp) limit? Are hardships going to be available? Someone has to track contributions vs account balance. Who is going to track vesting? What if something goes amiss? Who is going to make sure it gets corrected properly? Regular paychecks on a W2--who is going to track timing of deposits?

Again, depends on the client.

Client type 1 with a prototype plan will run a single payroll for the entire year that I'll be setting up and run initially in Dec and then even out over 2017. I'll then send them the forms to fund the account at the custodian in terms of amount to transfer in.

Client type 2 with a prototype will run recurring payroll which I will help them establish and set up ACH pulls from the custodian for regular, automated contributions.

The plan is to have these clients using QB with direct bank account feeds so we can monitor and discuss business income/expenses and W-2 Income.

I'd then monitor the custodial accounts to confirm that the amounts contributed tallied up to the amounts we established with the Payroll. One thing that might sound silly to you guys was an idea to do two ACH pulls per period on the custodian side, which would make it really apparent how much was coming in for EE and ER.

Things like hardship/loans/after tax contributions etc I would put into the bucket of things where a custom plan document and TPA would be brought in. This is what I consider client type 3, and even with individual plans if it seems these provisions are requested or going to be needed I'd suggest that an off the shelf plan isn't a good fit, since so much more can be achieved via customization from people with the experience you folks have.

Link to comment
Share on other sites

Wow. Well, I'll just say that in my opinion, anyone for whom $300.00 is too much to pay for qualified plan administration should NOT, NOT, NOT have a qualified plan.

I've been paid a lot of money by these "do it yourself" plans when filing under VCP, etc., to correct the problems.

I'm also curious - how do YOU get paid on all of this? I presume you are not a charitable organization. Are you a broker, receiving commissions, or a CPA? However, that's really none of my business, so I'm not offended if you decline to answer that.

Anyway, if you intend to go down this road, I wish you the best of luck. I think others here have already given you sufficient advice, and if you proceed, do it with open eyes (because the clients will most definitely blame you when something goes wrong) and make sure your E&O is paid up.

Link to comment
Share on other sites

If $300 is too much, how can they afford to put money into a 401(k) plan. Especially employer money.

The plan document can be set up to allow for fees to come out of the plan.

If these are self-employed individuals (non-C-corporation, non-S-corp.), they wouldn't (shouldn't (?)) be getting a "payroll" to deduct from, and thus would have no W2 to reference.

Are you going to advise how much Employer Contribution can go into a plan when someone's Schedule C income is $35,000 and they choose to defer $10,000?

An "off-the-shelf plan" can comfortably accommodate loans/hardships/after-tax transactions.

If you go this route, which you seem hell-bent on, why can't you create two accounts, one for EE and one for ER money? I see it all the time.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

Link to comment
Share on other sites

I think the key is ratio. $300 to a $10K contribution is 3% which is a tremendously high amount to pay as a fee for just one component of an overall solution. Even at $20K 1.5% is too much IMO.

These folk are all going to be running S elections, so that is where the W2 comes in.

I'm running a fee only advisor firm, there is a fee but it includes 'everything' and while I would share it here I wouldn't want to horrify you with how small it is :)

Link to comment
Share on other sites

I am going to make a different observation from the CPA and TPA points of view. I am simply an employer (myself) of a one-participant 401k plan. I appreciate the knowledge and experience of the members of this forum. It is primarily intended for professionals, but unlike some other professional forums, they are willing to share with everyone. Which I find extremely helpful, because as has been pointed out one-participant 401k plans are 99.9% the same as full blown plans.

With that said, I think the TPA viewpoints expressed in this thread are a little over reactive. It seems like the majority of replies here are assuming that we a talking about investment only accounts in conjunction with separate plan documents with no support from the financial institution. These absolutely require a TPA. But...

From the OP's posts, I rather think we are talking about standard protype backed plans marketed by mainstream providers. Therefore, I am assuming we are talking about a standard prototype one-participant plans from a financial institution.

Even the main stream providers differ in the level of services they provide. Some only act as custodian, leaving the the trustee and administrator choice to the employer. Some extend that to provide trustee services. They vary in the level of record keeping they provide. They all leave the administrator choice to the employer.

Sure the principal can specify a third party administrator (and if necessary trustee), but the vast majority of such one-participant plans are operated with the principal acting possibly as trustee, full/partial record keeper, and/or full/partial administrator.

We can argue whether that is a good idea or not. Unfortunately, the providers market these plans as nothing more than a SEP IRA with the possibility to increase your contributions, by adding employee deferrals if you haven't otherwise used up that space. The reality is that most people with one-participant 401k plans operate in blissful ignorance.

So a knowledgeable CPA can provide useful services in contribution calculations, record keeping, and administrative advice. This is certainly better than what currently happens with the majority of one-participant sponsors being relatively clueless of what lies beneath the surface of their plans. However, my experience and anecdotal evidence leads one to conclude that many CPAs are also clueless in even the most basic issues.

As a corollary, there have been a lot of inferences based on facts not in evidence. Given my assumption.

1. Every provider I am familiar with; monitors LRMs revises/restates the plan document when required. All that is required by the administrator is to timely provide amendment certification and complete a new adoption agreement in a timely basis. I have only needed to do this twice in the last dozen years.

2. Yes, controlled groups and affiliated service groups are complex and I would consult a retirement plans professional. However, all that is necessary is to know the basics to know you need assistance when the circumstances arise.

3. Most providers track contributions and earnings by account type. Some will track 402g and 415c limits.

4. Unless I am mistaken I don't believe the issue of in-service distribution prior to 59.5 has anything to do with pre-tax vs. post-tax. My understanding is that all deferrals and their earnings regardless of type and non-vested employer contributions can not be withdrawn prior to 59.5 even if the plan allows in-service distributions. Vested employer (pre-tax) contributions and earnings can be withdrawn prior to 59.5.

5. All one-participant employer contributions are fully vested.

6. There is no anti-discrimination testing.

So my opinion is this. If and only if we are talking about standard prototype plans at a major provider, there is no reason why the OP can't provide value add to their clients on these plans. At some level this is not that much different than the services a CPA provides on other areas of tax law. Provided the CPA acquires the necessary knowledge.

The plain fact is that plan sponsors are simply not going engage a TPA for a mainstream provider one-participant 401k. At the end of the day are they better off with the assistance of a reasonably knowledgeable CPA or flying solo?

Link to comment
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
 Share

×
×
  • Create New...