Current Solo K - New Plan Next Year

[sdix401k]

 I have a new client who has a solo k. They will have a number of new employees in 2020. We want to set up a new plan for the company plan 002. ( Client want's to keep current plan, but will make all contributions for owner and employees to new plan )

I am thinking that this will be fine but I need o freeze solo k, Solo K has 100% vesting - new plan would not. Are there any BRF issues if solo l is frozen?

I realize I will still need to aggregate for Top Heavy. Any one see any issues here? What it be an issue of the solo k was not frozen?

[Bird]

Well, if you read other threads on this subject, you'll find that many of us object to the term "solo k."  It is a marketing term, not a different type of plan.  You have a 401(k) plan that just happens to cover only the owner, and if you do nothing, new employees will enter the plan.  If it were me, I'd keep the existing plan and maybe amend it as necessary.  (Actually, if it were me, the plan wouldn't need any amending.)

Why would you want a new plan...oh I see, the vesting issue.  Well, yes, vesting is problematic.  I don't see any way around 100% vesting.  Shrug - it is what it is; that's a flaw in the creation of the original plan.  It isn't fixed by adding a new plan.

[Calavera]

3 hours ago, Bird said:

(Actually, if it were me, the plan wouldn't need any amending.)

I just love this.

[justanotheradmin]

Spot on Bird. 

[401king]

6 hours ago, Bird said:

I don't see any way around 100% vesting.  Shrug - it is what it is; that's a flaw in the creation of the original plan.  It isn't fixed by adding a new plan

How would a new plan not fix the vesting issue if the new plan had a vesting schedule?

[Roz Yovovich]

If the new employees won't be hired until 2020, amend the vesting schedule before any of them are hired.  The owner will be the only one who would benefit under the old schedule.

[Luke Bailey]

sdix401k, you're looking at the wrong reg. Not BRF, but discriminatory amendments and terminations (just turn the page to 1.401(a)(4)-5). It's facts and circumstances, but certainly seems possible that the IRS could allege that 401(a)(4) is violated by what you describe. Although audits are infrequent, the agents I have dealt with could pick this up and sing their teeth into it.

[Luke Bailey]

21 minutes ago, Roz Yovovich said:

If the new employees won't be hired until 2020, amend the vesting schedule before any of them are hired.  The owner will be the only one who would benefit under the old schedule.

My first thought, sdix401k, is that Roz is correct, because such a change would not appear to violate 411(a)(10). However, take a look at 1.401(a)(4)-5). It's facts and circumstances, but certainly seems possible that the IRS could allege that 401(a)(4) is violated by what you describe. I can't recall seeing much in the way of guidance or case law on 1.401(a)(4)-5, but you should probably check. 

[Lou S.]

Why not amend the vesting schedule in 2019 for the current 401(k) before you hire anyone? How can that be discriminatory at the time of the amendment?

[Larry Starr]

8 hours ago, sdix401k said:

 I have a new client who has a solo k. They will have a number of new employees in 2020. We want to set up a new plan for the company plan 002. ( Client want's to keep current plan, but will make all contributions for owner and employees to new plan )

I am thinking that this will be fine but I need o freeze solo k, Solo K has 100% vesting - new plan would not. Are there any BRF issues if solo l is frozen?

I realize I will still need to aggregate for Top Heavy. Any one see any issues here? What it be an issue of the solo k was not frozen?

There is no reason to set up a new plan; if the "solo k" is from one of those marketing firms that think there is such an animal and they have a crippled document, you probably want to amend and replace with a more reasonable document.  More than likely, the 100% owner has a bunch of years of service; change to a 2/20 schedule and he would still be 100% vested if he has six years, so changing to a 2/20 schedule should cause no problem.  
So now the question: why does the owner "want to keep the current plan"? What does he think that will do for him?  More than likely, he has something in mind that is not necessary or can be accomplished with the single plan.

One last thing, you COULD have two plans (though, to quote our 37th president: "that would be wrong"), and if they were mirror images of each other (with the appropriate language for eligibility purposes), then he could stay in the plan 001 and a new plan 002 could be produced. But there is no logical reason to do this.

[Luke Bailey]

sdix401k, obviously if the guy has enough prior service to be 100% under the 2/20 schedule, there is no discrimination issue and Larry's point wins the day.

[401king]

Can a company freeze a plan and start a new plan immediately or does the 12-month rule apply? 

[sdix401k]

Thank you everyone for posting.  The issue behind the question is the existing plan has a lot of dollars in the plan and wants to avoid some asset based RK Fees. I understand a solo k is a 401k plan and employees would enter under that plan if not terminated or frozen.

The issue with 401king is that this would be a successor plan and assets cannot be distributed.  My idea with freezing the plan and starting a new plan would be that the assets could stay where they were and all new monies from everyone come to the new plan 002 with new provisions - using a Non-Standardized document versus the protoype that exists now which is a Schwab Plan.

I could amend the current plan and keep it as 001 but now I have a participant that has access to different investment options then the current people at least for prior assets??

I also understand that if I amend the plan now that the owner will be the only one who is 100% vested.

So while on the face of it it may not seem to logical the crux of the issue is if I freeze the current plan ( I know still file a Form 5500 each year ) is there an issue with having a new plan 002 that all future money goes into for everyone?

I am not sure how 401(a)4 is violated as there are not active employees other than the owner and the plan would be frozen prior to anyone else being hired?

Thansks!

[Larry Starr]

To everyone (I'm not trying to pick on sdix401k): I wish everyone who posts messages on these boards would post the entire real issue and give all the information about the situation rather than trying to minimize their posted question.  Our business is one of almost infinite nuances that make a real difference in what can and can't be done.  For this original posting, the real issue is avoiding asset based fees on existing assets (that belong to the owner) when he moves to a platform because he is now going to have employees.

So now, let's deal with that and forget all the prior responses.

Yes, I think you will have a BRF problem if HCE can direct his prior assets into anything he wants but all new money is restricted to just the platform options.

How we would solve it?  No platform!!!  Set up plan 002, (this will be the "parent plan") and everyone will be eligible, except for a provision that excludes from it any employee who participates in any other plan of the employer.  Have it be trustee directed (like most of our clients).  Keep plan 001 (this will be the "subsidiary plan), but do restate onto the same document as 002 and have the eligibility for the plan be exclusively (by name) your HCE and change 001 to trustee directed in the document restatement. Note, you have only one person in the trustee directed plan, so you effectively get what you want.  All the HCE money continues to go into plan 001; all the other participants go into plan 002.  Now, they can be invested differently so long as, in plan 002, he meets the fiduciary requirements of diversification and prudence. 

And if he really want the participants to be able to select their own investments (always a bad idea anyway!), then he will have to live with the asset fees on the money that was previously in the plan and you just have to amend plan 001 to meet the new design. 

[justanotheradmin]

1 hour ago, sdix401k said:

I could amend the current plan and keep it as 001 but now I have a participant that has access to different investment options then the current people at least for prior assets??

This issue would exist even if you had two different plans, as they would need to be tested together for the most part. It's common for HCE to have/want brokerage options but not offer them to NHCE. Is the HCE a plan fiduciary? If so, how do they justify that the investments in their account are good for them, but all of the other participants have to stick to a recordkeeping platform? I'm not saying it can't be done, but it would be a difficult argument to make, and not one I would attempt.

There are several recordkeeping products out there that include a brokerage option / window. Alternatively, I have seen plans give out annual notices to participants informing them that the default is XYZ at recordkeeper ABC, but that a brokerage option through DEF is also available, here are instructions on how to do that and the person to contact to set it up. But it makes the plan much more complicated, and I would hazard is rarely done correctly. 

It's not clear to me what your role is in relation to the plan. If you are in an advisor capacity (either as an FA or producing TPA), my first question is are there limitations to what kind of investment options you work with? There are some low cost recordkeeping options out there, particularly if there is a large transfer coming in. Can you research those and provide other options to the employer? 

[Bird]

On 9/24/2019 at 5:32 PM, Lou S. said:

Why not amend the vesting schedule in 2019 for the current 401(k) before you hire anyone? How can that be discriminatory at the time of the amendment?

For the record, I want to note this is correct and thereby correct myself.  The term "solo 401(k)" made me crazy...

[Larry Starr]

29 minutes ago, Bird said:

For the record, I want to note this is correct and thereby correct myself.  The term "solo 401(k)" made me crazy...

Bird, we have a special psychotherapy session to the ASPPA annual for just this situation; it's always a big fun party!

[Luke Bailey]

31 minutes ago, Bird said:

For the record, I want to note this is correct and thereby correct myself.  The term "solo 401(k)" made me crazy...

I'm not sure. 1.401(a)(4)-5 is all "facts and circumstances." It is vaguer than the most of the qualified plan rules, and I'm not sure that the IRS pushes it often. But take a look, for example, at Example 2.

[Lou S.]

On 9/26/2019 at 5:09 PM, Luke Bailey said:

I'm not sure. 1.401(a)(4)-5 is all "facts and circumstances." It is vaguer than the most of the qualified plan rules, and I'm not sure that the IRS pushes it often. But take a look, for example, at Example 2.

It's an interesting position and I think would be very aggressive of the IRS to try to apply it to any potential future hires. Otherwise how would a company with any kind of turnover ever change a vesting schedule to something more restrictive? And there are clearly rules in place to chance a vesting schedule, preserve vesting, and give certain participants with 3 years a service an option to remain on the old schedule. I mean here as I understand it there are no other employees besides the one HCE. There are no NHCEs and no past NHCEs to test for discrimination at the time of the amendment.

[Luke Bailey]

On 9/26/2019 at 6:17 PM, Lou S. said:

It's an interesting position and I think would be very aggressive of the IRS to try to apply it to any potential future hires. Otherwise how would a company with any kind of turnover ever change a vesting schedule to something more restrictive? And there are clearly rules in place to chance a vesting schedule, preserve vesting, and give certain participants with 3 years a service an option to remain on the old schedule. I mean here as I understand it there are no other employees besides the one HCE. There are no NHCEs and no past NHCEs to test for discrimination at the time of the amendment.

Lou, I somewhat agree, except for the "Otherwise how would a company..." part. Simple. Just don't 100% vest the owner before you hire a bunch of NHCEs.

[Lou S.]

Maybe this is a facts and circumstances thing on timing. I guess I'd be more comfortable with the amendment if the Plan has been around a couple of years that if this is a new 1 person K where he's got 1 year of service and is hiring EEs next year.

[Bird]

21 hours ago, Luke Bailey said:

I'm not sure. 1.401(a)(4)-5 is all "facts and circumstances." It is vaguer than the most of the qualified plan rules, and I'm not sure that the IRS pushes it often. But take a look, for example, at Example 2.

Yeah thanks.  "I thought I was wrong once but I was mistaken."  Actually I think it is ok if the owner is in fact 100% vested under the new schedule - although it definitely looks bad if you follow the sequence.

absolutely a problem if you make him 100% vested when he wouldn't otherwise be on the new schedule.

[RatherBeGolfing]

On 9/26/2019 at 5:06 PM, Larry Starr said:

Bird, we have a special psychotherapy session to the ASPPA annual for just this situation; it's always a big fun party!

Count me in! Can we add a session on "my payroll company said they would do my plan for free"?

[Bill Presson]

On 9/29/2019 at 6:11 AM, RatherBeGolfing said:

Count me in! Can we add a session on "my payroll company said they would do my plan for free"?

There's an Ethics in Recordkeeping session. Maybe it will be covered there?

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