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401(k) Plans for Loans Only?


coleboy

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I was given a new 401(k) plan to administer for a small business consisting of only a few employees.  Immediately after the plan was made "active", the owner rolled over some money into the plan. She has since taken 2 loans out against this rollover money. She is not making any contributions and no one else has signed up for the plan.

This is the 2nd plan that I have where the owner rolls money into it for the sake of being able to take out a loan. Again, no other employees are contributing to it.

Is this legal?

 

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Not trying to be evasive but isn't the answer to your question- depends?

It seems like if they are really offering the right to all the other employees to defer and roll money into the plan and they are simply choosing not to do so I am not thinking of a reason why it isn't legal. 

On the other hand I do think it is odd no one is deferring.  So if it turns out that the owner isn't really given the other people an opportunity to defer that would be a problem. 

That at least is my initial reaction.  One needs more facts to know for sure if it is all on the up and up. 

But on its face I can't see a problem. 

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the only technical issue I can think of is (OK, that the IRS thinks of), but emphasis mine.

 

https://www.irs.gov/retirement-plans/no-contributions-to-your-profit-sharing-401-k-plan-for-a-while-complete-discontinuance-of-contributions-and-what-you-need-to-know

While plan sponsors aren’t required to make contributions to their profit sharing/401(k) plan every year, contributions must be “recurring and substantial” for a plan to be considered ongoing. Employee Plans Exam guidelines state that if the employer hasn’t made contributions in three of the past five consecutive years, the plan may have incurred a complete discontinuance of contributions.

When a complete discontinuance of contributions occurs, the plan sponsor must treat the plan as a terminated plan and fully vest all participant accounts for the plan to remain qualified. Determining if there’s been a complete discontinuance of contributions is based on facts and circumstances, for example, the plan sponsor’s history of profitability, and the probability of future contributions from the sponsor.

..............

so when filing the 5500 I'm not sure what gets puts down for "Was there an amendment to terminate the plan"

or how long you can keep a 'terminated' plan "active"

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Tom, I've always understood that restriction to apply to vesting only. In other words, yes, it is treated as a "terminated" plan for purposes of 100% vesting, but you don't have to "terminate" the plan and distribute the assets. Agree/disagree?

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Just curious:  What does it cost the employer to maintain this plan each year, all-in (your firm's fee, custodial fees, etc.), just for the owner to be able to borrow up to $50k?  

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no idea Belgareth. that is all the IRS write-up indicates is 100% vesting, but we know the IRS 'frowns' upon a plan just sitting, but I doubt they can force you to shut it down completely (unless they get real tax greedy and find some reason!)

as jpod indicates it sounds ..well maybe 'smells' is a batter word as the company pays to maintain a plan for the sole purpose for the owner to get a loan. 

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