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Converting Regular 401K To Solo 401K?


pone55

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As a hypothetical, a small company with two participants in a 401K has one employee leave the plan, thus leaving the plan with a single employee.   Assuming this small business wants to move forward with no employees, is there any path for converting the existing 401K into a Solo 401K?

At first glance, you might think that the new Solo plan could be created (and that might be done at an online brokerage due to simplicity), and then the assets could be transferred from the old plan to new plan, and then at that point the old plan could be terminated.    The problem is there are regulations that forbid you from opening a new 401K within 12 months of closing the old one.    That seems to suggest that the only safe paths would be to do some kind of in-place conversion of the existing plan, but is there even an allowed process for that?

Another solution might be to rollover the plan assets to IRAs, then sit on your hands for 12 months and open up a new 401K.

What's the best solution here, keeping in mind that a small firm with under $250K in assets in a plan probably is not going to hire an ERISA lawyer for $20K to break new ground in interpreting seldomly-used corners of regulations.

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OP, I am assuming that you are a plan sponsor, and not a TPA, etc..., from the only other thread you have posted in about after-tax contributions.

What are you trying to do? Are you really looking for "simplicity" or saving on the administrative cost by moving to a one-participant 401k provider?

If all you are trying to do is move to a no cost plan at Fidelity, Vanguard, TD Ameritrade, etc.. there is no need to terminate the plan. Once you have no eligible employees, amend the plan to the new custodian and possibly trustee, and rollover the assets to the new plan.

You can name yourself as administrator, but your prior posts do not lend themselves to a high degree of confidence. I would suggest that you at least hire a professional to make sure you do the transition correctly and to at least make sure you do things properly for this and next year.

 

If your goal is to make after-tax contributions, the above is not going to work. I am not aware of any custodian provided plan that allows after-tax contributions in their adoption agreement.

This is going to require an independent plan document and a TPA to administer and properly follow the IRS' new guidelines in Notice 2014-54. Some large corporate plans are still confused about the proper procedures. This is not going to be free, but the yearly administrative costs and filing fees for the 1099-R(s) are likely to be less than the administrative burdens of a plan with employees and the yearly Form 5500 even when the plan balance was < $250K

The good news is that as a one-participant plan, you don't have to worry about ACP testing.

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23 hours ago, Bill Presson said:

There are no regulations that prohibit starting a new 401(k) and merging the two plans.

But what are you trying to accomplish with a "solo 401(k)"?

Because I think a 401(k) that only has a single employee (assuming the owner) pretty much is a solo 401(k).

A solo 401K with assets under $250K has no requirement for filing a form 5500 and also has no stress test requirement.   So I assume the objective is increased simplicity and reduced cost to manage a trivial plan structure.

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6 hours ago, spiritrider said:

If your goal is to make after-tax contributions, the above is not going to work. I am not aware of any custodian provided plan that allows after-tax contributions in their adoption agreement.

This is going to require an independent plan document and a TPA to administer and properly follow the IRS' new guidelines in Notice 2014-54. Some large corporate plans are still confused about the proper procedures. This is not going to be free, but the yearly administrative costs and filing fees for the 1099-R(s) are likely to be less than the administrative burdens of a plan with employees and the yearly Form 5500 even when the plan balance was < $250K

The good news is that as a one-participant plan, you don't have to worry about ACP testing.

That's a great point about existing custodians for solo 401K plans not supporting the after-tax provision.  Thanks for stating that.

No one ever said anything about the sponsor administering their own plan.   If you have names of administrators you like and think are well suited to such a trivial plan, I would love to get referrals.   

 

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10 hours ago, spiritrider said:

OP, I am assuming that you are a plan sponsor, and not a TPA, etc..., from the only other thread you have posted in about after-tax contributions.

What are you trying to do? Are you really looking for "simplicity" or saving on the administrative cost by moving to a one-participant 401k provider?

If all you are trying to do is move to a no cost plan at Fidelity, Vanguard, TD Ameritrade, etc.. there is no need to terminate the plan. Once you have no eligible employees, amend the plan to the new custodian and possibly trustee, and rollover the assets to the new plan.

You can name yourself as administrator, but your prior posts do not lend themselves to a high degree of confidence. I would suggest that you at least hire a professional to make sure you do the transition correctly and to at least make sure you do things properly for this and next year.

 

If your goal is to make after-tax contributions, the above is not going to work. I am not aware of any custodian provided plan that allows after-tax contributions in their adoption agreement.

This is going to require an independent plan document and a TPA to administer and properly follow the IRS' new guidelines in Notice 2014-54. Some large corporate plans are still confused about the proper procedures. This is not going to be free, but the yearly administrative costs and filing fees for the 1099-R(s) are likely to be less than the administrative burdens of a plan with employees and the yearly Form 5500 even when the plan balance was < $250K

The good news is that as a one-participant plan, you don't have to worry about ACP testing.

Some of this is incredibly incorrect.

1) You would not rollover the assets to the "new plan", you would roll them over to the new account at the new Custodian/Trustee.

2) I just checked the first document I had from a very large brokerage and after-tax are most certainly allowed.

3) 1099-R's???????? 

All I have time to comment on.  

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12 hours ago, pone55 said:

A solo 401K with assets under $250K has no requirement for filing a form 5500 and also has no stress test requirement.   So I assume the objective is increased simplicity and reduced cost to manage a trivial plan structure.

That is a function of if the only participants are owners and the amount of assets in the plan.  Its history doesn't matter so there is no need to terminate the old plan and start a new one.  You might get some letters from the IRS asking where the next Form 5500 is if after years of filing them you stopped.  Maybe someone who has gone through that can give you insight how big of a pain it was or wasn't to get the IRS to understand. 

I for one would file a Form 5500-EZ if I was in that position regardless to start a statute of limitation.  That is just me. 

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24 minutes ago, RatherBeGolfing said:

Same here.

The only tricky part of this is remembering to watch for assets to grow enough to need to begin filing again -- and tracking the limit below which no filing is needed to be sure it hasn't changed.

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21 minutes ago, K2retire said:

The only tricky part of this is remembering to watch for assets to grow enough to need to begin filing again -- and tracking the limit below which no filing is needed to be sure it hasn't changed.

To clarify, we file an annual return for all of our one-participant plans, regardless of assets.  Doing so starts the SOL for the plan year and eliminates any need to track limits or whether the plan is still exempt.  In my opinion, there are no compelling reasons to rely on the exemption.

 

 

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OP, just curious:  what is your relationship to this client?

A few points on your original post:

As people have said, you won't terminate the old plan, it will just become a one-participant plan ("Solo-K") because of its make-up.  Plans are free to move their assets to other providers whenever they want, how often they want.   Where the assets are held has no underlying affect on the plan itself.

You mentioned brokerage accounts.  Will the brokerage house separately account for the different contribution types that may be put into the plan? (401(k)/Roth deferrals, Match, Profit Sharing, After-Tax, Rollover, etc)  There may be withdrawal restrictions on some of the money types, as well as taxation issues on distribution.

My suggestion is that you find several Third Party Administrators in your area whose primary job it is to take care of these things.  Ask them about servicing a 1-particiapnt plan. There may be some up front costs to transitioning to a new plan document and client on-boarding, but nothing even close to $20,000.  An ERISA attorney won't even be involved.

 

QKA, QPA, CPC, ERPA

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

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On 2/20/2017 at 11:05 PM, Mike Preston said:

Some of this is incredibly incorrect.

1) You would not rollover the assets to the "new plan", you would roll them over to the new account at the new Custodian/Trustee.

2) I just checked the first document I had from a very large brokerage and after-tax are most certainly allowed.

3) 1099-R's???????? 

All I have time to comment on.  

Incredibly incorrect???

1) It is obvious that I meant to say rollover to the new account, because I was talking about the same plan.

2) Try contacting them and asking them if you can make after-tax contributions to their respective one-participant plans. They use their approved plan document for many different types of customers, but their adoption agreement for one-participant plans does not allow after-tax contributions. For example on another issue, Fidelity does not even allow their Self-Employed 401k plan to make Roth 401k contributions even though the plan  document clearly supports them.

3) The rollover of the after-tax contributions and earnings will require 1099-R(s). One if both go to a Roth IRA with the earnings taxable and one each if the contributions are rolled to a Roth IRA and the earnings are rolled to a traditional IRA with no taxable income.

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Spiritrider:

1)  You wouldn't be rolling anything over in the  first place.  It would merely be a transfer.  No 1099's.

2)  I don't have much experience with choosing different vendors and their limitations.  But you originally mentioned a no-cost plan at Fidelity.  I'm sure there are LOW-COST options that allow for after-tax money.

If they go to a TPA, chances are it will have its "own" document that can accommodate a myriad of options. 

3)  For a one participant plan, you are only going to need a 1099-R (maybe two?) probably only once in its lifetime--when it terminates.

QKA, QPA, CPC, ERPA

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

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3 hours ago, BG5150 said:

Spiritrider:

1)  You wouldn't be rolling anything over in the  first place.  It would merely be a transfer.  No 1099's.

2)  I don't have much experience with choosing different vendors and their limitations.  But you originally mentioned a no-cost plan at Fidelity.  I'm sure there are LOW-COST options that allow for after-tax money.

If they go to a TPA, chances are it will have its "own" document that can accommodate a myriad of options. 

3)  For a one participant plan, you are only going to need a 1099-R (maybe two?) probably only once in its lifetime--when it terminates.

1) Yes, technically it is a transfer. I know there is no 1099s. I never mentioned a 1099 for this action. My terminology was imprecise, but it is clear what I was referring to.

2) What I believe the OP was suggesting was a no cost one-participant plan marketed directly to end users. For example, Vanguard Individual 401k, Fidelity Self-Employed 401k, TD Ameritrade Solo 401k, etc...

None of these providers offer low cost after-tax options for small businesses let alone one-participant plans. For example, Vanguard does not offer 401k plans with their own record keeping for plans < eight (8) figures. They partner with Acensus and the minimum administrative expenses are ~$4K/year. The same is true for Fidelity and the others.

If you want a one-participant/small business plan with after-tax contributions you are going to need a TPA. You are not going to be able to use their no cost marketed plan. That is my point.

3) To take maximum advantage of Notice 2014-54 in a plan with after-tax contributions and in-service withdrawals prior to 59 1/2, the participant is going to want to make at least one rollover of contributions and earnings/year. This will require one or two Form 1099-R(s) in any year you do a rollover.

Let us not get lost in the weeds. My points to the OP were:

  • There was a fairly straight forward process to change providers to a no-cost one-participant plan at major financial institutions or to a lower cost TPA. I was speculating that the administrative fees charged might be less for a plan with just a single participant owner.
  • As far as I last knew, the mainstream providers do not offer after-tax contributions in one-participant plans they market. If someone has factual information that this has changed, I'm all ears.
  • Short of that, the bottom line is, the OP can have free or after-tax, but not both.

I admit I was imprecise in the details, but could we be constructive/helpful and direct the OP to a moderate cost option.

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"If you want a one-participant/small business plan with after-tax contributions you are going to need a TPA. You are not going to be able to use their no cost marketed plan. That is my point. "

And I'm telling you that an absolutely free, off the shelf 401(k) plan from a major brokerage firm allows for after-tax.  Now, just because it is available doesn't mean that it is wise for the OP to use such a document without engaging a TPA.

 
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4 hours ago, Mike Preston said:

"If you want a one-participant/small business plan with after-tax contributions you are going to need a TPA. You are not going to be able to use their no cost marketed plan. That is my point. "

And I'm telling you that an absolutely free, off the shelf 401(k) plan from a major brokerage firm allows for after-tax.  Now, just because it is available doesn't mean that it is wise for the OP to use such a document without engaging a TPA.

 

Spiritrider is referring to the off-the-shelf "Solo 401K" products.   Vanguard, Ameritrade, and E*Trade all offer Solo 401K plans that include Roth 401K, but when contacted Ameritrade and E*Trade deny including any provision in their standard plan for an after-tax contribution beyond Roth 401K.  

What due diligence I have done so far agrees exactly with Spiritrider's last summary "If you want a one-participant/small business plan with after-tax contributions you are going to need a TPA."

If you know of a specific broker whose standard Solo 401K plan language includes a provision for after-tax contributions - either by default or as an option - please post the name of that broker and the name of the contact you spoke to there.   You might know of some hybrid product being offered by a specific broker that is not well-advertised.

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Who is this major brokerage firm that allows after-tax contributions to their marketed no-cost one-participant only plan? Is this a full fledged plan with record keeping, or is it just a plan document and custodial services? If it is the latter, that would be playing with fire without a TPA.

If it is the former, they are certainly not making this well known. There are many people who have been looking for such an offering for the last couple of years. As recently as a few months ago, I verified that Fidelity, Vanguard, and TD Ameritrade do not allow after-tax contributions to their one participant only plans.

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One participant only plans are a marketing gimmick.  I am not aware of anybody who offers what I consider to be administration for free.  Are you saying that Ameritrade, Vanguard or E-Trade provide "One participant" plans a compliant document, custodian and/or trustee services, 5500 filing, transmittal of withholding and 1099 services for free?  Note that I intentionally left out anything which falls under the rubrick of contribution determination. I was under the impression that none of the free services offered 5500 filings.

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Yes, one-participant plans are a marketing gimmick, but it is a marketing gimmick that allows them to offer such plans at no cost because their administrative costs are lower. To enforce this, they do not allow you to adopt or remain in these plans if you have or acquire eligible employees.

Vanguard is even stricter. Their adoption agreement does not provide for the specification of age or service requirements. It defaults to no restrictions on eligibility what so ever.

They do provide a compliant document that they keep up to date with amendments/restatements if you respond to their directions. All of the ones I have seen do provide custodian services and some provide trustee services. They will do transmittal of withholding on withdrawals and report/issue 1099s where appropriate.

You are correct. To my knowledge, none of them provide Form 5500 filings. They send to a report the information necessary and instructions for filing.

You still haven't responded with who this brokerage is that will provide a no cost plan with after-tax contributions.

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7 hours ago, spiritrider said:

no cost plan

Using language like this does a huge disservice to the plan sponsors (current and future) and participants who lurk these boards.  There is no such thing as a no cost plan.  The ones who market themselves as such are riddled with proprietary investments, termination fees, and other hidden costs that if properly taken into account would show that they are anything but "no cost".  But effective marketing using terms like "no costs", "free" and "soloK" has created the appearance of a free alternative as long as you use a certain broker or investment house.

 

 

 

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9 hours ago, spiritrider said:

They will do transmittal of withholding on withdrawals and report/issue 1099s where appropriate.

You are correct. To my knowledge, none of them provide Form 5500 filings. They send to a report the information necessary and instructions for filing.

 

At one time I had a single person money purchase plan with Vanguard. They never mentioned anything about 5500 filings. If I hadn't been in this business I would not have known I needed to do that, or even what that was.

At the time of the EGTRRA restatement they told me that it was not legal to restate a money purchase plan to become a profit sharing plan. Even when I explained that I was doing exactly that for most of my clients, they wouldn't consider it.

At the time of the PPA restatement they told me they were getting out of the business and I would have to either terminate the plan or move it elsewhere. I chose to terminate it, but I don't remember if they issued a 1099-R for the rollover or not.

Sometimes you get what you pay for!

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