Leaderboard

Terminology comes and goes. Two things are are most important. One is that the terminology is used broadly enough that there is a shared understanding of what is meant by it. The other is that the terminology does not conflict with its shared understanding within government agencies that oversee the industry. How many people today would understand what was meant by a Keogh plan or an H.R. 10 plan? How many know that today's hot Roth trend is named after William Roth, the Senator from Delaware that came up the Roth IRA in 1989 that in 2001 morphed into the Roth 401(k)? How many know that the concept of 401k deferrals was used in plans in the 1950s, frowned upon by the IRS, but then validated when section 401(k) was added in 1978? Interestingly, in the late 1970s people started out calling the 401(k) plan as salary reduction plans, and that terminology was not well received by employees. Today, solo-k generically is recognized as a one-person plan as does the IRS https://www.irs.gov/retirement-plans/one-participant-401k-plans. Some pre-approved plan document providers have products that basically are pared down adoption agreements of their 401(k) documents. These products use the term "owners only plan". Given the many ways that one-person plans get into regulatory trouble, maybe we should refer to owners only plans as "OOPs"!

Although not recently, we used to see mistakes where Plan A contribution was mistakenly deposited into Plan B. The solution was simple: just transfer it to the correct location/trust. If you need an adjustment for earnings, make a reasonable estimate and do it. But do it immediately, and document it completely.

Just to add to what Paul said - you will never get an in-kind transfer from one RK to another. All the shares are held in omnibus accounts.

If the custodian of the current brokerage account also handles IRAs, and as @Peter Gulia said if the document allows (if it doesn't you can amend), then you may be able to do in-kind distribution by simple transfer of the account from plan to IRA. Even so, a market value of the distribution and rollover will need to be determined and reported on a 1099R.

As of right now, it looks like the article is running under the title "America’s Booming Solo Workers Embrace $72,000 Tax Shelter" Besides Form 5500, possible pain points include: Capturing any non-owner employees who are required to be covered (including long-term part-time employees) Analysis of related employers which could result in a controlled group or affiliated service group With respect to an unincorporated business, calculation of net earned income, both for purposes of limiting contributions to 100% of compensation and deduction of employer contributions to 25% of compensation Applying limitations on distributions Applying mandatory tax withholding on distributions Reporting distributions on Form 1099-R Applying a plan's loan provisions

I do not think you can formally state two groups, those employed 2/15/PY+1 and those not, because a person's grouping is not determinable by PYE. Draw a parallel to changing an HCE top-paid group election after PYE, where the result changes a person's status under the plan, which is impermissible. Using individual allocation groups in the document but in practice determining two allocation groups by your desired methodology is the best way to accomplish what they want IMHO and I think that of most others. If said 2/15 fell on a weekend or holiday and/or for whatever reason the plan sponsor wanted to accelerate or delay that date, individual groups compared to hardcoding, even if such was permissible, makes administration accommodating. Just because the document allows for flexibility doesn't mean it needs to be used. Finally, you mention a parent and a lot of subsidiaries all with their own plans with separate RKs and independent testing. Is no one concerned about testing in consideration of the control group?

Yeah, the times I have seen this error we didn't put this much thought into it. We got the money moved to the correct plan. If we thought it was material there was some earnings transferred. I have to admit I don't recall any of these plans ever getting an IRS or DOL audit also. But at times the KISS Principle works.

Any way to amend the trust so that a single trust holds both plans assets rather than moving dollars? I would have legal counsel opine because I don’t know that it can be done after the fact. But we do know it can exist.

Agree with your suggested solution but also strongly suggest some formal legal guidance which could also ascertain risk. I would not "cheap out" given the size of the assets. Other key thoughts: who made the mistake, when did it occur, when was it discovered, and how soon thereafter was it corrected? Was this one big errant transfer or a series of errant transfers? Were they caused by honest clerical errors or was someone asleep at the wheel not paying attention. Was this the plan sponsor's doing or a third party? Documenting all that and fixing ASAP at a minimum is what I would suggest - put the plans where they'd be had the mistake(s) not occurred. Maybe a VFCP filing would be appropriate. My only formal advice here - get qualified legal guidance.

Check the BPD - it should say that for a self-employed individual their compensation is their net earned income from self-employment, so whatever AA option gets checked I don't think it matters much.

Onboarding a plan requires attention to extremely granular detail that is customized to the plan provisions, the deconversion processes of the existing service providers including potentially the recordkeeper, TPA and investment firms, the client's internal administrative support including payroll, HR systems, and funding procedures, and to the you as the new service provider including everything needed to provide continuity of the rights and privileges of all of the plan participants. Coordinating all of this commonly takes 10-12 weeks, and starts with working out a detailed work plan in the first few weeks with all of the parties involved. The time for asking your questions is at the beginning of the conversion process and the people you need to ask are the client and the existing service providers.

Peter lays out the basis for arguing that the plans were closed out in 2025, and makes it clear that this is solely the plan's fiduciaries' (read client's) decision. I expect most practitioners would say don't sweat the $0.50 for Plan 1 and writing off the $0.50 with no adjustment to the 1099R, most would say it is really pushing it where the amount is $3,500 that was not closed out until 31 days after the end of the plan year. From the perspective of a service provider, I would explain to the client that it is their decision to make and their fiduciary responsibility and accountability for the consequences of their decision (unless you are a 3(16) provider). I would let the client know I disagree with the Advisor and I only would be willing to prepare a final filing for 2026 along with a 1099R for the residual payment. If the client chooses to follow the Advisor's "promise", then the Advisor can help the client find someone who is willing to close out everything for 2025. The plans are closing so there is no future work for you on those plans. If your relationship with the client is ongoing, keep in mind that if the client chooses to follow the Advisor's advice over yours, that says something about the relative value of your relationship to the client. This is also true about any relationship you may have with the Advisor.

Bigger picture questions: Why in this day and age would a plan have a 10% deferral limit? Was this an HCE? If not, could plan be amended retroactively to allow for that extra 2% deferral?

Plans limiting pre-tax catch-up contributions for employees not subject to section 414(v)(7). The rules of paragraph (b)(3)(i) of this section also apply to a plan that includes a qualified Roth contribution program and, in accordance with an optional plan term providing for aggregation of wages under § 1.414(v)-2(b)(4)(ii), (b)(4)(iii), or (b)(4)(iv)(A), does not permit pre-tax catch-up contributions for one or more employees who are not subject to section 414(v)(7). The bolded part makes all the difference here. Normally, you do not aggregate wages from multiple employers to deterimine if an employee is subject to mandatory Roth catch-up - even if the employers are part of a controlled group or otherwise aggregated for other plan purposes. However, the referenced sections provide for optional aggregation of wages if the companies are using common paymaster, are aggregated under 414(b), (c), (m) or (o), or in the year of an asset purchase. If the plan is optionally aggregating wages under one of those provisions, then you may end up with some employees who would not normally be subject to mandatory Roth catch-up, but who are solely because of the aggregation. What the quoted paragraph is saying is that a plan can restrict those employees to Roth catch-up even though strictly speaking they are not subject to 414(v)(7).

Has to take it this year when the plan terminates.

As a former TPA I will tell you these are generally not great clients. I dont mean in the sense that they are jerks or that they don't pay their bills. I mean they are so "unusual" from an operational perspective that only a partner can assist and answer their questions. There is no detailed work ti be done, so not much that a staff person can do. So if you bring on one of those clients, it's basically 100% partner time which starts to raise the quesiton of "can you charge enough money." I used to tell clients, "it's not worth it for you to pay me what I need to get paid to do this work for you, but I cant do it for any less. If you want me to be available to you when you call, I need a decent fee." I would review the plans all the time throughout the year for, amendments needed, invoicing, collections, you name it. Just having a plan on the books takes time even if I'm not doing any work. I used to charge $1,250 a year and I still think it wasn't enough sometimes.

As stated already, I think the majority of "solo 401ks" are created without a TPA, but via a financial advisor or CPA. Only after issues arise, all those already mentioned, does a TPA/Attorney get involved. Recently, I had one referred by a CPA where his client thought he had a SEP not a 401k plan, for over 15 years. Another was set up without anyone asking the ownership/controlled group question. I think these plans are more likely to have alternative investments which can bring more unknown complications. They seem simple to market and run, until they are not.

In addition to the issues mentioned by @C. B. Zeller, (the control group / affiliated service group / related employer group issue is so common!) some what I see: Disregard for deposit timing, both for deferrals, and Over contributions thinking it can count towards a future year even though the deposit occurs this year. - think throwing in an extra $100,000 because they have the cash available and want it to grow As well as disregard for limits, such as depositing up to what they think is the maximum, even though the W-2 compensation they have paid themselves(or a covered spouse) is substantially lower. Investments in unusual assets with no additional compliance such as an independent appraisal for valuation Assets/accounts titled to the business rather than the plan name when they were intended to be for the plan Starting more than one plan every time they get a new account or advisor. Or thinking they have more than one plan when really a new doc with a new account might be a restatement of the older document, but they don't realize it Compensation not being eligible - thinking that profit and loss is enough, and not having earned income, but still making contributions Failure to make any contributions - for 5, 10+ years(sometimes nothing beyond the first year) at that point the plan isn't really a plan and should be terminated and closed

Peter, just because the document says everyone is in their own group, it’s incredibly rare to actually have to test more than a handful of groups. For example, everyone that is employed on the February date would likely be in the same group for testing. The plan definition just provides flexibility on how they are grouped.

Hiya Peter! Thanks for all you do for this community, I appreciate the way you step up to make sure correct information gets out there and questions get answered. There are lots of other folks on this board that have also shared their deep experience, and perhaps they can weigh in here: In all the years I've been using the General Test for Non-discrimination (Cross testing), I've developed a "wait and see" attitude. I have been surprised many times when the math doesn't work. One really knows nothing until the tests are performed. I would advise a Plan Sponsor against jumping to conclusions about the likelihood of passing the tests. I have also been surprised when a Plan passes testing when at first glance I thought that it never would.

Also agree with @justanotheradmin and @Bill Presson. Assuming no coverage and nondiscrimination concerns, I would use the everyone in their own group document provision and then utilize that 2/15 methodology for allocation determinations. What you lose in that is the ability to statutorily exclude from testing those who terminate during the plan year with 500 or fewer hours. I do not think you could write the 2/15 of the following year into the document as your allocation entitlement would not be determinable by the plan year end. I think someone in this forum asked this same question (maybe with different date) within the last year or two, if memory serves.

Agree with justanotheradmin with one caveat: if the plan is top heavy, anyone employed on 12/31 will likely have to get a contribution whether they are employed in February or not.

Is this allowed? and if yes, does it have to be written into the plan document? offhand I don't know the answer to your first question. I suspect there is something about definitely determinable as of the last day of the plan year, but I am unsure, but I suspect it is allowed, based on my answer to the second question. Does it need to be written into the plan document at all? If the plan uses a "everyone in their own group" method of allocating the employer contribution, and testing passes, why would an allocation condition need to be written into the plan document at all? An employer could decide "everyone who wears blue shoes in November" gets an employer contribution this year, and the plan's TPA, recordkeeper, etc might never know that is the reason why some people got a contribution that year and not others, even if the TPA was the one who performed the testing. When the allocation groups are not a safe harbor classification - full testing has to pass anyways. So use whatever criteria or allocation restrictions the client wants and as long as it passes I would think its okay.

If the MPPP component is currently active then an advance 204h notice is required prior to such component being frozen/terminated. Only affected participants (active in the MPPP component) need get notice. If the MPPP component is not active as it was frozen previously, for which a 204h would have been required at that time, terminating the plan with that component does not trigger another 204h requirement. We see this all the time in DB world - issue 204h notice when plan is frozen, not again at termination (but is referenced in the Notice of Intent to Terminated - "NOIT").

If a participant specifies a 100%-of-pay elective deferral, many employers and plan administrators interpret a plan to restrain such a deferral to what’s available after required withholding. Here’s a simplified illustration, assuming no tax beyond Federal taxes, and assuming nothing else taken from the worker’s pay: Pay before any withholding $10,000 Withholding for OASDI tax $620 Withholding for HI tax $145 Net pay after withholding for wage taxes $9,235 Federal income tax withholding (22% x $765) $168.30 Pay available for elective deferral $9,066.70 Elective deferral $9,066.70 Net pay $0.00 I’m not aware of a particular statutory authority. Some might follow a principle that what otherwise would be a contract promise or obligation that would require a person to disobey applicable public law is legally unenforceable. This is not advice to anyone.

Exactly! Whenever I see the phrases "husband and wife" and "cash balance" and "overfunded", I wonder if the last one is true. Has there been a real 415 test? A consulting actuary would ask lots of questions, which might include: Why is a husband/wife plan structured as cash balance rather than traditional DB? Do the participant(s) have health status that impairs insurability? What is the magnitude of any "overfunding"? What are the ages of the participants? How soon do the participants plan to retire/cease working? Are there others (e.g., children) that might join the business? Do the participants plan to choose a lump sum distribution (at some later date) or choose a J&S payment form? Does the business also have a DC plan? A really good consulting actuary will explain to the plan sponsor how these questions are inter-related.

Putting insurance in a pension plan is usually a great idea if you are the agent making the sale. Your client should talk to their accountant and/or financial advisor (not the one selling him/her the insurance) and determine if it makes sense from a long term financial perspective. It might be a great idea, but more likely a its a horrible idea.

2% Shareholder premiums are generally already included in the box 1 figure. This is one reason why it is good to cross check comp on payroll reports against the actual W-2. Payroll reports through out the year do not usually include the 2% shareholder premium, it is tacked onto the final income reporting at year end and reflected on the W-2. An aggregated payroll report for the year may not include it, which it often is needed information to correctly determine Plan Compensation. The amount in box 14 is for informational purposes, not tax reporting purposes. So if the plan definition of compensation is gross W2 with no exclusions, usually you would take Box1 + pre-tax amounts in box 12. If there are pre-tax amounts NOT reported anywhere on the W-2, such as §125 or employee HSA contributions, those get added as well, because absent the employee's election to put money into those buckets they would have appeared on the W-2. Box 3 - I pretty much only use it for HPI determinations unless your plan doc has some interesting definition of compensation. Box 5 - this almost always means nothing for plan purposes unless the plan doc has an interesting definition of compensation

That's correct. The combined deduction limit doesn't apply if the DB plan is covered by PBGC. IRC 404(a)(7)(C)(iv)

On Santo Gold’s hypo, isn’t the account balance after the first loan is made still $50,000—that is, $25,000 participant loan receivable + $25,000 other investments? But wouldn’t ERISA § 408(b)(1) and Internal Revenue Code § 72(p)(2)(A) limit the amount for a second loan? Consider 29 C.F.R. § 2550.408b-1(f)(2)(i) https://www.ecfr.gov/current/title-29/section-2550.408b-1. Consider 26 C.F.R. § 1.72(p)-1/Q&A-20 https://www.ecfr.gov/current/title-26/section-1.72(p)-1. Even before applying the tax Code limits, ERISA § 408(b)(1) limits the outstanding balance of all loans to the participant to more than half the participant’s vested account (measured after the origination of each loan). On Santo Gold’s hypo, if the participant when applying for a second loan has not yet repaid anything on the first loan, isn’t the second loan $0?

The time to negotiate provisions about a recordkeeper’s conversion-out is before the plan’s responsible plan fiduciary makes a service agreement with the recordkeeper the plan later might want to leave. The time to negotiate provisions about a recordkeeper’s conversion-in is before the plan’s responsible plan fiduciary makes the service agreement with the recordkeeper that would, if engaged, process the conversion-in. For many plans, either observation is impractical because a plan might lack bargaining power. Beyond whatever service obligations a plan might get, a transition from one recordkeeper to another calls for not only caring work from every service provider but also strong and sustained oversight and supervision from the plan’s responsible plan fiduciary. Each recordkeeper might, to supplement the plan fiduciary’s attention, appeal to the other recordkeeper’s sense of business decency and fair dealing. A mature recordkeeper might work to get and keep a good reputation as both a graceful loser and an accommodating winner. Bill Presson is right that—at least regarding mutual fund shares, collective trust fund units, and insurance company separate account units (forms of investment designed for redemptions)—a transfer of property other than a payment of money is unusual.

If I understand the issue, the plan limit is 10% of the sum of the pre-tax and Roth deferrals for the year, the excess deferrals are excess amounts that must be refunded. The correction is to make a refund so the total of deferrals remaining in the plan are 10% of compensation. The correction method does not specify any requirement on whether that the refunded excess amounts must reflect proportion of pre-tax and Roth deferrals that were originally made into the plan. The plan also has no guidance. With the lack of specific guidance, its on the Plan Administrator to decide how the plan will address the situation. The PA needs to keep in mind that this type of operational decision establishes a precedent for future occurrences. One consideration for the PA to keep in mind is the time and effort involved in making the refund. Operationally, refunding from pre-tax first before refunding any Roth is far less complicated than either refunding pro-rata or refunding Roth first. Consider that refunds of Roth get into issues like tax basis accounting, possible taxation of earnings paid from the Roth account, and year of taxation. If these are not concerns for the PA or the PA is a masochist, then the PA could consider asking the participant to specify how much to refund from each account.

If the point you ask about isn’t in the IRS’s correction procedures, consider: Remove the excess from the elective-deferral non-Roth and Roth subaccounts in the same proportions that the participant contributions (including the incorrect amounts) had been directed to those non-Roth and Roth subaccounts. That way might approximate what would be the account had the incorrect amounts not been taken from the participant’s pay. And it might lessen a participant’s opportunity to make an after-the-fact tax-treatment choice. Yet, this might be merely one of a few ways to correct the failure. This is not advice to anyone.

Yes, if someone gets employer contributions in a year that are equal to their 415(c) limit of the lesser of 100% of pay or $72,000, then any and all deferrals would be deemed catch-up contributions. In your example, the person could actually have had compensation of $72,000, an employer contribution of $72,000, and $8,000 in catch-up contributions.

@SSRRS Did you file using third party software (FIS, FTW, etc...)? Did you get an AckID, or did this prevent you from actually getting it filed? While I agree it sounds like an error on their end, it will probably take quite a bit of back and forth to get it resolved.

Hoping that Mike Johnson doesn't see his shadow and give us 6 weeks of government shutdown!

They are likely a control group so one plan with each LLC adopting should be fine. Even if not a CG they could do that as a multiple employer plan. However, if the desire is to use a vendor's solo-k product, need to make sure it accommodates whatever structure/LLC relationship you have.

FYI, the Directory of Federal Tax Return Preparers with Credentials and Select Qualifications lists 363 ERPAs. The list shows name and address, and can be searched by name or proximity to zip code. You can have a party and invite all your ERPA neighbors 🤣.

I have heard of consequences from not filing a Final 5500. The two partners rolled their plan accounts to IRAs and thought that was that. Five or so years later, the IRS said your money purchase plan is still on-going. Where is your latest restatement and 5500 filing? I don't know what it cost to untangle the mess.

You will report credits earned in each year 2023, 2024 and 2025. It helps to see what the form looked like (https://www.irs.gov/pub/irs-pdf/f8554.pdf) to see what information is required, but renewals are easier using pay.gov. The place to start is here: https://www.irs.gov/tax-professionals/enrolled-agents/maintain-your-enrolled-agent-status Here is a fairly detailed description of the renewal process: https://accountably.com/irs-forms/f8554ep/ (my including this here is not an endorsement of their service). I agree the calendar-year dates for earning credits tied to off-calendar-year dates for the renewal application period and a different off-calendar-year dates for the expiration of the renewal makes it seem more complicated than it needs to be, but in our business most things that are tied to off-calendar-year dates seem more complicated than they need to be.

Could not agree more. However, I believe we are going to see more issues as AI becomes more prevalent with the "do-it-yourselfers". We've referred a handful of cases over the past several months to ERISA Attorney's for correction of a host of issues when the "do-it-yourselfer", or their other "professional advisor", realizes there is an issue.

Okay, the idea here is that she wants to get to her DC annual additions maximum, which will likely exceed the sum of the deferral max and then the 6% DC allocation. So she does the rest as employee after-tax. as having no employees means the ACP test is passed. As for the backdoor part of the Roth, that's just a Roth conversion of some/any of the total, including the employee after-tax, so that she's basically gotten the full DC max and it's all/some become part of a Roth account within the plan.

Said another way, its incredibly rare to test more than a handful of rates. Everyone in their own group, maximize owner, and 5% to all others is very common (as long as it works for testing of course).

Ok lets be dumb and set aside the oddities but they have been covered enough I won't beat the dead horse too much. I would check if this is an Affiliated Service Group. I have to admit I know enough about these to know to look as you see them infrequently. I mean what are they doing for this company as "owners" if not managing it? It might not be a service organization for example. My guess even if they think they can thread the needle on the Affiliated Service Group rules and so forth in an audit the way they are being paid becomes the issue. This seems to be set up to exclude the rank and file from benefits they want for themselves. I just try to avoid the stink of pigs in this job and this has the stink of pigs trying to get benefits for themselves they aren't willing to give the rank and file.

CuseFan - excellent memory!

Also remember that limit only applies if the cash balance plan is NOT subject to the PBGC.

CuseFan is correct in pointing out that the 80/120 is used for determining whether the plan must file a 5500 versus a 5500-SF. BPF916, the 1-100 participants for the start-up credit really is not black and white. The count is based on the employer: having 100 or fewer employees (not participants) who had compensation of at least $5,000 (regardless of plan eligibility) in the preceding year (subject to an available election to have the first credit year be the year preceding the year containing the effective date of the plan) There also is a 2 Year Grace Period where the employer is considered eligible for the credit for the 2 years following the last year the employer was eligible. Check out all of the eligibility criteria because there are certain conditions that will disqualify an employer from taking the credit such as the employer was involved with a merger, or there are related companies with existing plans, or if the employer had a plan in the 3 years prior to the new plan. None of this has to do with the 80/120 rule.

The 80/120 rule only applies with respect to which 5500 form a plan may file, nothing else that I know of.

Going fully remote with no experience in the field likely will be next to impossible. Consider a strategy that demonstrates a strong work ethic and commitment to learning the business along with establishing some personal contacts with people in the business. Pursuing starting to build professional credentials by enrolling in courses available from industry groups/associations like ASPPA. A QKA (Qualified 401K Administrator) would be a great start, as would a RPF Certificate (Retirement Plan Fundamentals). There are many different types of firms that work with retirement plans - third party administrators, recordkeepers, financial advisors, accountants, banks/brokerage houses... - so explore opportunities with any of these firms that are close enough for starting out with a hybrid approach. Look for professional associations that hold periodic, in-person events. They provide opportunities to connect face-to-face with industry professionals. There also are some mentoring opportunities such as the Thrive Mentoring Program. You can find additional here: https://www.usaretirement.org/get-involved/special-initiatives/thrive-mentoring-program/ It will be a challenge, but the professionals in the retirement plan industry welcome anyone who is committed to working in the field. Best of luck to your daughter!

This amount should just be earnings that goes into the participant's account. These lost earnings are technically interest paid on a loan the employer is considered to have taken from the participant's account during the period of time the loan payment was being held by the employer before being sent to the trust. The participant did not pay this interest, the employer did. It is considered like the employer took a separate loan from the participant's account and must pay interest on that separate loan. It is the earnings that were lost (should have been earned in the participant's account( because the payment of the loan repayment was not sent to the trust on time Accordingly, the payment of these lost earnings should not affect the amortization schedule of the original loan. Again, due to it being an untimely deposit of the loan payment, it is not an amount owed by the participant on the participant's loan but an amount owed to the participant by the employer due to its prohibited transaction loan. Make sense?