Solo 401(k)Plan

[Dobber]

Small business owner (no employees) would like to set up a Solo K plan - however he wants to add his child (minor) to the payroll and have the child participate in the plan.  I've read that in order to qualify as a Solo K ("Owner-Only")  an employer must have no full-time employees other than themselves, a business partner and a spouse. - What about children?

Question -Would the plan continue to qualify as a Solo K if the child is eligible to participate? 

 

Thank you

[C. B. Zeller]

17 minutes ago, Dobber said:

I've read that in order to qualify as a Solo K ("Owner-Only")  an employer must have no full-time employees other than themselves, a business partner and a spouse.

Read where? "Solo K" is not a team that's defined in any of the law or regulations. It's just a marketing name.

There is such a thing as a "one-participant plan" which means they are eligible to file Form 5500-EZ. A one-participant plan includes a plan that covers only a sole proprietor and their spouse, partners in a partnership and their spouses, and (new starting in 2020) 2% shareholders in an S-corporation and their spouses, children, parents and grandparents.

Any plan adopted by an employer which has no non-highly compensated employees will be exempt from most testing, which is the real benefit of a "Solo K" plan anyway. So go ahead and adopt a regular 401(k) plan and don't worry about it.

[CuseFan]

He should also make sure his child is performing service for the business that is commensurate with the pay he is provided.

[John Feldt ERPA CPC QPA]

Yes, "solo-k" is a marketing term. Beware of using certain "solo-k" documents if you might ever add any employee to the business.

In your case, with an owner's child in the plan, the plan is now subject to ERISA. A fidelity bond applies, certain notices and disclosures apply, and the 5500-SF applies.

Usually a "solo-k" is thought of as an owner-only plan that is exempt from ERISA. It files 5500-EZ only when the assets of all the employer's solo plans are over $250,000. They are not required to provide ERISA 404(a)(5) fee disclosures or blackout notices. SPDs are not required. ERISA 204(h) notices are not applicable, no fidelity bond, the ERISA fiduciary requirements do not apply, etc.). But, IRS tax-qualification rules do apply: you have a qualified written plan document (including good-faith interim amendments and timely periodic restatements), you must operate according to the terms of the plan, etc.

So, I think of a solo-k as an owner-only plan: a plan that only covers the 100% owner (and spouse), or if the business is taxed as a partnership, it is a plan that only covers the partners (and spouses). Go beyond that, and you are not an owner-only plan and you are subject to ERISA.

[Gilmore]

On 3/5/2021 at 7:30 AM, C. B. Zeller said:

and (new starting in 2020) 2% shareholders in an S-corporation and their spouses, children, parents and grandparents.

CB, would you mind clarifying what you mean by "children, parents and grandparents"?  Thanks very much.

[C. B. Zeller]

Sec. 318 attribution applies when determining who is a 2% shareholder of an S-corp for purposes of determining whether the plan is eligible to file Form 5500-EZ.

See prior discussion here: 

 

 

[ratherbereading]

On 3/5/2021 at 1:23 PM, CuseFan said:

He should also make sure his child is performing service for the business that is commensurate with the pay he is provided.

Interesting.  I have a plan where the owners wife and 2 kids get a W2 as well as safe harbor/profit sharing/and max out their deferrals and none of them actually work there. Ever.   The 2 kids have full-time jobs other places. Their max 401k contributions come out of one check at year-end.  One of the kids over-contributed because they forgot they were getting maxed out at their father's company . . . 

[CuseFan]

Not saying that doesn't happen, a lot, and if their accountant is on board, then fine, but how is that justified as a reasonable deductible business expense?

[Gilmore]

On 3/7/2021 at 9:24 AM, C. B. Zeller said:

Sec. 318 attribution applies when determining who is a 2% shareholder of an S-corp for purposes of determining whether the plan is eligible to file Form 5500-EZ.

Thank you CB, I definitely missed that.  Why would the addition of attributed owners apply only to 2% shareholders only do you think?

[C. B. Zeller]

If you go into the thread I linked @RatherBeGolfing explains the whole story. The short version is that starting in 2020 the instructions for the 5500-EZ say that a partner includes a 2% S-corp shareholder, as defined in IRC 1372(b), and 1372(b) references 318.

[RatherBeGolfing]

3 hours ago, Gilmore said:

Thank you CB, I definitely missed that.  Why would the addition of attributed owners apply only to 2% shareholders only do you think?

@C. B. Zeller beat me to it by a minute or so haha.  They didn't really add attribution.  All they did was expand the Form 5500-EZ eligibility by treating 2% S-corp shareholders as partners for filing purposes.  The only reason we are talking about attribution here is because the definition of 2% shareholder includes attributed ownership.

[Gilmore]

So if I'm understanding correctly, I have a partnership with an unrelated individual and we each have our child working with us, just the four of us.  We file an SF.  We incorporate as an S-Corp and now we can file an EZ?  Thanks.

[RatherBeGolfing]

If all participants would be considered 2% shareholders of the S-corp, by direct ownership or attribution under 318, you would treat all participants as partners for filing purposes.  A plan that covers only partners would file an EZ.

  

[BG5150]

1 hour ago, Gilmore said:

So if I'm understanding correctly, I have a partnership with an unrelated individual and we each have our child working with us, just the four of us.  We file an SF.  We incorporate as an S-Corp and now we can file an EZ?  Thanks.

There's not much of a difference between the two.  Hopefully the type of informational report you make to the DOL is not a determining factor as to whether you become an S-Corp or not.

[Gilmore]

Thanks guys for the clarifications and letting me beat that to death.  It's just interesting to me that in making the instructions more equitable between partners and 2% S-corp shareholders they swung it now more in favor of the shareholders.  Practicality aside, it's just interesting.

[K-t-F]

 

On 3/10/2021 at 9:50 AM, RatherBeGolfing said:

If all participants would be considered 2% shareholders of the S-corp, by direct ownership or attribution under 318, you would treat all participants as partners for filing purposes.  A plan that covers only partners would file an EZ.

  

2020 on,  adding a child would not cause the plan to now need to file a 5500-SF.  And because "all participants are partners" due to attribution the plan will not be covered by ERISA.   Correct?

[RatherBeGolfing]

2 hours ago, K-t-F said:

 

2020 on,  adding a child would not cause the plan to now need to file a 5500-SF.  And because "all participants are partners" due to attribution the plan will not be covered by ERISA.   Correct?

Well, for filing purposes, 2% shareholders are treated as partners and would file an EZ.  Technically, the plan itself is not a one participant plan because the definition of an employee benefit plan was not amended.  

[K-t-F]

 

28 minutes ago, RatherBeGolfing said:

Well, for filing purposes, 2% shareholders are treated as partners and would file an EZ.  Technically, the plan itself is not a one participant plan because the definition of an employee benefit plan was not amended.  

Ok... so the plan is only required to file an EZ... and is technically not a one participant plan.  

• Is a Fidelity bond required
• Is everyone an HCE due to attribution so the ADP test is a pass
• Is the plan entitled to ERISA protection

This new rule only pertains to what form to file, an EZ or an SF

I appreciate your patience.

[BeanCounterBlues]

If an LLC, that has elected to be taxed as an s-corp (a common situation), sponsors a 401k plan, and hires their 15 year old child for administrative work (bona fide employment), is the child attributed by IRC 318 and therefore is considered "partner" for purposes of 5500 EZ vs 5500 SF? 

Assume that a Plan is sponsored by a sole member LLC (which had filed IRS Form 2553 (s-corp election) and was approved by IRS to be taxed as s-corp), with no employees, other than the owner who receives a W-2 due to form of taxation, and the 15 year old child (also receiving a W-2).  The Plan has immediate eligibility with essentially no age and service conditions.  Does this Plan which formerly would have filed an EZ, still file an EZ after the hiring of the child, or have to file an SF post - child hire?

Meaning, does the legal form of entity (LLC) take precedence, or does the method of taxation (s-corp) take precedence?