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Record Keeping Requirements for Solo 401(k)


matth100
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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 :)

You get what you pay for Matt.

Either the solo-person can become an expert at running his/her own plan and take all the risks of blowing the rules and disqualifying the plan when they screw something up or they can hire someone qualified to do it.

There are a lot of programs out there that don't really need a TPA. IRA, SEP, Simple-IRA (At least I think I don't really follow them).

But basically the guy wants an $18K+ tax deduction with none of the cost associated with making sure that is properly done.

If you'd like you can track all the sources for them (different types of money have different withdrawal restrictions for one), monitor when the IRS has required amendments, check for when the 5500 is due, determine if they have employees who might be eligible (bringing in a whole host of other issues), determine if they have other business that may be related, help them with formal termination of the plan when they want to get rid of it, explain the loan rules when they want to borrow money and help them comply with those rule, explain if and when they are eligible to take money out of the plan, help them prepare 1099-R when money does come out of the plan,...

There is simply a lot to monitor on a 401(k) plan even if it doesn't have much money so you have to decide is the extra tax deferral now worth it and do you want to go it alone and hope it doesn't blow up down the road or do you want to hire competent help.

If it wasn't a formal retirement plan that had to comply with all the IRS rule they would call it an IRA, not a 401(k) plan.

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there is a fee but it includes 'everything'

Do they get fries with that?

Thanks for adding value to the discussion.

No offense was intended.

I think that hidden within this statement is really the underlying aspect of this whole discussion. What is the perceived value of something?

For some, my original post may have been of value because it added some levity to the conversation.

For others, it may have added value to the discussion by highlighting the possible dichotomy of being able to provide services that include everything while seeking for insight on some fairly routine procedures for pension professionals.

For still others, it added no value because it did not address a desired question or was perceived as a belittling comment.

Similarly, some may see little value in paying fees for certain services because they prefer to the take the associated risks or assume little or no risk will exist.

Others see a greater value in paying the fees to a seasoned professional due to the peace of mind they will have.

To each his own.

...but then again, What Do I Know?

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Lou - just for grins, I'd like to point out that there is what to me is an unexpectedly high level of noncompliance out there on SIMPLE-IRA plans. (I don't see this problem, generally, on SEP plans)

Lots of VCP filings on the SIMPLE's.

I suspect many, if not most of us in the TPA world have seen a lot of noncompliance on the brokerage house one person off the shelf plans. To be fair, we probably only get brought in on the bad ones, and don't generally see the good ones, so perhaps my perceptions are skewed. You know, there are lies, damn lies, and statistics...

Here's the thing. On these plans, CAN someone do it on their own? Absolutely. Are the odds of doing it right, with no problems, for no money with no professional help, in their favor? Best of luck, because they may need it.

Anyway, it's a big step off my soapbox, so I'm going to climb down now.

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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.

Different document providers offer different levels of support with this. Some just send out an amendment and say sign this by such-and-such date and be done with it. In situations such as the OP, it seems like the doc provider would be doing just that--providing the docs.

Oftentimes, rules go into affect way before the plan amendment language is ready, so who is going to make sure these plans are being run according to these rules?

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.

Yes and no. For some people, what may seem irrelevant is really important. It goes back to the idea of "You don't even know what you don't know."

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

The OP is saying the Financial Adviser wants to track it in his office. It has nothing to do with the "provider;" they aren't trying to run this on the TIAA or Fidelity platform. The OP was asking about a "glaring" issue of how to split up EE & ER contributions.

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.

True, 59 1/2 distributions of deferrals do not see a difference in pre- and post-tax money. However, the gross deferrals, no earnings, are allowed before 59 1/2 for hardships. And ER contributions MAY be eligible for withdrawal. The plan document must allow for it.

Where pre-tax and post-tax gets fuzzy is when an actual distribution is taken. The account must accurately track the basis for post-tax and the earnings thereon. If a partial distribution is taken, who is going to figure out how much pre-tax, post-tax and earnings will be taken? Who will be issuing the 109--Rs?

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

No. Not true.

6. There is no anti-discrimination testing.

True. Until the owner has a secretary who works part time and the owner thinks she'll never be eligible for the plan. Until she works some overtime during a difficult period and has 1,020 hours worked for the year. Now it's NOT a one-participant plan any more.

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.

Are there CPAs who could provide this service? Sure. However, I've come across many CPAs (and Financial Advisors) to whom a little knowledge is a very dangerous thing.

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?

A "reasonably knowledgeable CPA" may be more dangerous than flying solo.

My thoughts in bold.

QKA, QPA, CPC, ERPA

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

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Different document providers offer different levels of support with this. Some just send out an amendment and say sign this by such-and-such date and be done with it. In situations such as the OP, it seems like the doc provider would be doing just that--providing the docs.

Oftentimes, rules go into affect way before the plan amendment language is ready, so who is going to make sure these plans are being run according to these rules?

I asked the provider of the docs and they said they took care of this, any updates are filed appropriately and both the participant and myself would be advised of any changes.

The OP is saying the Financial Adviser wants to track it in his office. It has nothing to do with the "provider;" they aren't trying to run this on the TIAA or Fidelity platform. The OP was asking about a "glaring" issue of how to split up EE & ER contributions.

Not exactly the case - I was asking (sorry for not being clear) if I run it on a custodial platform what additional measures should I take to ensure that it is all running properly. What I've noticed is that some providers (EG Vanguard) split the transactions into EE/ER at time of contribution whereas others (TD Ameritrade) do not. I just wanted to make sure that if we were with a custodian like TD (using their model prototype plan that they update) that contributions were tracked properly.

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there is a fee but it includes 'everything'

Do they get fries with that?

Thanks for adding value to the discussion.

No offense was intended.

I think that hidden within this statement is really the underlying aspect of this whole discussion. What is the perceived value of something?

For some, my original post may have been of value because it added some levity to the conversation.

For others, it may have added value to the discussion by highlighting the possible dichotomy of being able to provide services that include everything while seeking for insight on some fairly routine procedures for pension professionals.

For still others, it added no value because it did not address a desired question or was perceived as a belittling comment.

Similarly, some may see little value in paying fees for certain services because they prefer to the take the associated risks or assume little or no risk will exist.

Others see a greater value in paying the fees to a seasoned professional due to the peace of mind they will have.

To each his own.

Sorry about that - I've done extensive research and nothing had led me to believe that TPAs had a sense of humor :)

I personally don't see a dichotomy here. If the answer is routine and straightforward, why not share it rather than put up walls?

I'm not sure I want to go through the entire QPA course just to discover that it was actually pretty straightforward all along!

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Bottom line: can you track the contributions on a platform that doesn't separate them? Of course. It happens all the time with pooled plans.

The plan document should tell you when and how to allocate the earnings. You can build a spreadsheet to calculate those earnings. You (someone) will need to furnish the participants with a statement at least annually with a breakdown by money type of their account.

QKA, QPA, CPC, ERPA

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

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But I think a lot of the advice here boils down to this:

You may think you are merely going down a small rabbit hole by record keeping the funds. But you may find yourself waist deep in a warren of rules and contingencies you weren't prepared for. Some tunnels are straight forward, but some are winding and complex and lead to further winding and complex tunnels.

QKA, QPA, CPC, ERPA

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

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Different document providers offer different levels of support with this. Some just send out an amendment and say sign this by such-and-such date and be done with it. In situations such as the OP, it seems like the doc provider would be doing just that--providing the docs.

Oftentimes, rules go into affect way before the plan amendment language is ready, so who is going to make sure these plans are being run according to these rules?

I asked the provider of the docs and they said they took care of this, any updates are filed appropriately and both the participant and myself would be advised of any changes.

The OP is saying the Financial Adviser wants to track it in his office. It has nothing to do with the "provider;" they aren't trying to run this on the TIAA or Fidelity platform. The OP was asking about a "glaring" issue of how to split up EE & ER contributions.

Not exactly the case - I was asking (sorry for not being clear) if I run it on a custodial platform what additional measures should I take to ensure that it is all running properly. What I've noticed is that some providers (EG Vanguard) split the transactions into EE/ER at time of contribution whereas others (TD Ameritrade) do not. I just wanted to make sure that if we were with a custodian like TD (using their model prototype plan that they update) that contributions were tracked properly.

Well... I had one recent solo 401k plan where the sole participant set up 2 TD Ameritrade accounts... one to hold his rollover, and the other to hold his 401k deferrals. And both TD accounts were linked so a consolidated statement was also available. So even with TD, you should be able to set up 2 TD accounts... one for EE, one for ER, and also get a consolidated statement. And this may be even better than Vanguard, as the EE and ER money can be invested differently.

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Lou - just for grins, I'd like to point out that there is what to me is an unexpectedly high level of noncompliance out there on SIMPLE-IRA plans. (I don't see this problem, generally, on SEP plans)

Lots of VCP filings on the SIMPLE's.

I suspect many, if not most of us in the TPA world have seen a lot of noncompliance on the brokerage house one person off the shelf plans. To be fair, we probably only get brought in on the bad ones, and don't generally see the good ones, so perhaps my perceptions are skewed. You know, there are lies, damn lies, and statistics...

Here's the thing. On these plans, CAN someone do it on their own? Absolutely. Are the odds of doing it right, with no problems, for no money with no professional help, in their favor? Best of luck, because they may need it.

Anyway, it's a big step off my soapbox, so I'm going to climb down now.

Leave it to the IRS to make SIMPLE plans exceeding complicated in some respects. LOL

With the 1 person plans the biggest issues I've seen over the years, where a TPA often gets called in after the fact happens when the 1 participant puts the plan on auto pilot and forgets about it are -

1. Failure to keep up with IRS amendments or restatements.

2. Failure to comply with the 415 limits

3. Failure to comply with the 404 deduction rules.

4. Improper and often undocumented in-service distributions

5. Failure to identify eligible employees when they "forget" they have hired one or more.

6. Improper and undocumented Plan Loans that often fail to comply with 72(p)

7. Not filing 5500 when assets exceed threshold.

8. Not formally terminating the plan.

9. Not filing a final 5500 even is assets don't exceed dollar limit.

What it comes down to is what level of comfort is the 1 participant owner willing to assume.

Like you said it can be done and possibly without a hitch but fixing errors after the fact is often much more expensive than avoiding the error in the first place.

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Please elaborate. Under what circumstances would a one-participant plan ever have a vesting schedule?

maybe I should have said "not necessarily."

I'm not saying there HAS to be a vesting schedule. In fact, if you are designing a one-participant plan there probably should not be a vesting schedule.

However, you could write a plan to have one in anticipation of hiring an employee who may become eligible for the plan. This way you don't have to remember to amend the plan later.

QKA, QPA, CPC, ERPA

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

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If the "solo" participant is near or over age 70 at plan inception, a vesting schedule... like 3-year cliff, will delay RMD's. FWIW

That's actually really neat... but just thinking, if the owner should die before they are vested, what would happen to the ER side?

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If the "solo" participant is near or over age 70 at plan inception, a vesting schedule... like 3-year cliff, will delay RMD's. FWIW

That's actually really neat... but just thinking, if the owner should die before they are vested, what would happen to the ER side?

Usually benefits are fully vested upon death while employed.

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If the "solo" participant is near or over age 70 at plan inception, a vesting schedule... like 3-year cliff, will delay RMD's. FWIW

Don't forget that all participants must be 100% vested upon reaching Normal Retirement Age.

Yes... so define NRA as later of 65 or 5 years of participation. That should get you through the 3 year vesting. All assuming the participant is at or near age 70 at plan inception.

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Question related to the value such vesting would offer to the plan participant: if they did not incorporate this clause then they would have to start RMDs after 70 1/2 even if still working - would they be able to both contribute and RMD in conjunction in this scenario? If so, the lost opportunity from the delayed RMD likely isn't much in a single participant plan?

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A qualified plan is not allowed to impose a maximum age for making contributions; per IRC Section 410(a)(2). This is a basic question that is typically addressed by the plan's TPA.

I've been providing sales consulting for financial advisors, directly and indirectly, for the past 15 years. This was something I've always emphasized. No matter how simple or watered down you think a plan may be (i.e. one person plan), you still need someone who actually knows what they're doing. I've provided too many VCP corrections for these plans that decided they can operate without a skilled TPA. I've even provided some corrections for plans that had TPAs (and that was pretty unfortunate).

At the end of the day, it doesn't matter if your painting a house, pulling a tooth, or operating a qualified plan, you should seriously consider retaining the services of someone who is skilled in that area; or prepared to be stressed beyond your wildest imagination. When filing VCP submissions, I typically look beyond the revenue (which is good for my practice) and feel a little sad knowing how easily avoidable many of the issues would've been had the services of a skilled professional been retained.

Just thinking out loud :-)

Good Luck!

CPC, QPA, QKA, TGPC, ERPA

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I like basic questions - thanks for the answer :)

So if all we are doing is delaying the RMD a couple of years and not offering any other value, the return doesn't seem to be overly great in relation to the added complication and potential risk. Is there any other value add that the vesting option, if possible, would offer?

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