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Missed Deferral Opportunity - Solo 401(k)


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I have a client that maintains a solo 401(k), and while meeting with them to prepare their plan restatement, it appears that they let their two children work part-time during 2020 and 2021.  The plan document provides no conditions for eligibility, and only excludes non-resident aliens and union employees.  So, it appears that the children should have been allowed to defer to the Plan and their missed deferral opportunity constitutes an operational failure.  As a result of the daughters working as part-time employees, it appears that the Plan can no longer be considered a solo 401(k), and thus must now:

1. Distribute a Summary Plan Description.

2. File a Form 5500-SF instead of 5500-EZ.

3. Must now perform non-discrimination testing

4.Must now perform coverage testing.

5. ....?

 

Is there anything else I may be missing?  Upon review of EPCRs, the missed deferral opportunity itself seems like an "insignificant" operational failure, and thus eligible for SCP, but concerned that the overall effects of making it no longer a Solo 401(k) may require a VCP correction.  Any other thoughts?

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How old were the children as of 12/31/2021?  How are you defining part-time, less than X hours?  Please clarify regarding the document eligibility, elected no minimum age/service, made no election whatsoever, or document is written as no age/service condition?

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I will say, if you've got just the owner and two children, you don't really have nondiscrimination/coverage to worry about.

 

Ha, what's the worse sin - backdating the document or backdating "I'm not interested" election forms from those kids who still want to share in the inheritance some day? 😈

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If, for a plan’s cash-or-deferred arrangement, the plan does not provide an automatic-contribution arrangement, doesn’t the absence of a participant’s affirmative election to defer mean she elects “cash” compensation (that is, no § 401(k) elective deferral)?

See 26 C.F.R. § 1.401(k)-1(a)(3)(ii) (explaining that the absence of an affirmative election has a default consequence), https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFR6f8c3724b50e44d/section-1.401(k)-1#p-1.401(k)-1(a)(3)(ii).

However, the plan’s administrator might evaluate whether an employee received the plan’s governing document, a summary plan description, or some other notice of her opportunity to elect for or against § 401(k) elective deferrals.

If an employee is or was a minor, an administrator might evaluate whether notice to the minor’s natural guardian or conservator (a parent) is or was notice to the minor.

That a plan’s administrator might have breached a fiduciary responsibility by failing to deliver a summary plan description does not by itself mean the plan or its cash-or-deferred arrangement fails to tax-qualify under Internal Revenue Code § 401(a)-(k).

Peter Gulia PC

Fiduciary Guidance Counsel

Philadelphia, Pennsylvania

215-732-1552

Peter@FiduciaryGuidanceCounsel.com

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Please let's not confuse getting paid with being employed.  If the kids are not really employed, and did not work there, then they are not eligible for the Plan.  I see this all the time with even babies on the payroll.  "it appears that they let their two children work part-time".  Is that an assumption, or a fact?  

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  • 2 weeks later...
On 9/15/2022 at 3:19 PM, StephenD said:

Please let's not confuse getting paid with being employed.  If the kids are not really employed, and did not work there, then they are not eligible for the Plan.  I see this all the time with even babies on the payroll.  "it appears that they let their two children work part-time".  Is that an assumption, or a fact?  

No, they worked there and received W2's.  

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Besides, the earning of income still triggers the deferral eligibility; service-less income is a coverage question.  But putting aside non sequiturs, what did you mean by the document provides no conditions for eligibility?  There can be miles of leeway between explicitly saying no conditions, and not electing any.  Does the document actually check off the no age or service requirements option?

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