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Timing and funding of 'solo conversion'


matthny

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Client is participating in a solo 401(k) and would like to terminate it.  If they have already funded the account during 2021, are those EE/ER contributions valid, or does the account need to remain open for the entire fiscal year in order to qualify them?

Edit to explain title: they wanted to convert the plan to a broader 401(k) but haven't been able to find a good option for this, so they are exploring whether they can just close out the solo plan and restart in 2022 with a different plan provider. I'm sure there's options to help them solve that part of it, but as we do so, they have asked about the impact of closing in a year that they have funded it.
 

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1 hour ago, Bill Presson said:

They already have a 401(k). Closing the plan and starting a new one with a new provider is silly. Just find the new provider. If the new provider knows what they are doing, it will be simple.

Yeah, agreed. But they also want to understand the rules so they can have a good grasp of it all. Do you happen to know?

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Well, if they terminate the plan in the very near future, it will cause a limitation on the 415 allocation amounts. There are also some who argue that a sole proprietor doesn't have earned income until the last day of the year, so it would probably cause a $0 allocation eligibility. Also, there are timing restrictions on terminating a 401(k) and starting a new one.

So, I would highly recommend they not terminate the plan in 2021. They should hire a TPA and then decide where they want the money to go.

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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They can't terminate, distribute the deferrals, and establish a new plan without satisfying the successor plan rules under IRC 401(k)(10)(A). I agree with Bill - what they want to do is silly.

Possible their current document, being a "solo k" document (that term drives me crazy) may not have the provisions they need, so the solution is NOT to terminate the plan, but to amend (or restate, if necessary) their EXISTING 401(k) plan.

P.S. - the regulation may be rather more illuminating. 1.401(k)-1(d)(4).

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Well for one if they have funded the 401(k) for 2021 and terminate in January they may run into 415 limit issues depending on the size of the contribution. If they had employees who were eligible but not contributing they probably have ADP (and ACP if there is a match) issues. Lastly they are almost certainly top heavy under 416.

If they are looking at a 401(k) to cover the rest of the employees, they probably already have one in the "solo-k" and just don't know it.

As Bill mentions amending and restating the existing 401(k) is likely the path of lease resistance.

As for a good option I woold recommend calling several local TPA firms to get quotes on converting the existing solo-K plan document and transferring the administration to them.

 

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