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Paging @Larry Starr for his rundown on why real estate inside a qualified plan is not a wise choice, even when legally doable....

For most of us, this would be accurate. WCP

Is this dumb? Most likely. Is it illegal? I doubt it. I am not a lawyer however. Now they might have to pay Unrelated Business Income Tax (UBIT) on the profits since it sounds like they are trying to run a tax free business. I would look into that topic as if they have to pay taxes on their profits my guess is they will be less interested. You might want to search this forum using the words "real estate" for the many horror stories of how RE in a 4k plan can go bad.

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.

As usual, we have nowhere near enough information to answer thoroughly. The answer is not simple when dealing with a RE asset. While it can be a permissible investment (so long as we don't have a prohibited transaction involved, which I often see is the situation), it causes its own problems. For example, are there other employees in the plan? Is it participant directed or pooled? There can be BRF (benefits, rights and features) issues depending on whether all participants can buy into it or whether all participants are automatically part of it (as in a pooled trust). Then, you have the problem of annual valuation; expect to have to spend a significant amount of money every year to get professional appraisals that would stand up to an IRS audit (that means, not what 3 real estate agents think it might be worth). Also, if it is a really good investment, the client is turning what should be capital gain property into ordinary income property, which could be giving up a substantial tax benefit. Because the plan is not an active developer of real estate as a business, it should still be a passive investment. But depending on the "deal" with the developer, it can lead to potential UBTI, which I always tell clients that becomes their CPAs problem (not mine) since they will have to file TAXABLE income tax returns for the plan if there is enough UBTI. There are lots of reasons for NOT doing this; more reasons for NOT doing it than doing it.

You might want to check with a trust company that facilitates retirement plan distributions in respect of missing or non-responding participants. Two that come to mind are Penchecks and Millennium Trust. I expect they have experience with this situation and may have a solution such as creating rollover IRAs and/or bank accounts in the participants' names.

Interesting in that you mention cash in a sinking fund to cover repurchase LIABILITY. So if the company is expecting to shell out half a million dollars, for example, to buy back the shares of upcoming retirees, yes, that cash may be an asset but it is offset by the expected repurchase liability. As EG noted, it's up to the valuation firm to sort out, but the presence of an asset does not necessarily translate into ownership equity.

Thanks Lou. I was thinking correctly but then second guessed myself because my memory "ain't what it used to be"!

I just love this.

Yes look at the same 5 for common ownership and identical ownership tests. In your case owners 1 through 5 have 91% common and 91% identical ownership which is the highest amount so you have a CG.

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.

We don't know the way the investments are set up. If it's on a platform, then the "plan" will definitely show the assets leaving - they are in the general assets of the recordkeeper (and might return to the plan if uncashed for long enough! - but that's not what we're talking about). If it's not on a platform, and the plan has its own checking account (and I assume that is the case here), yes the bank records will show assets as of the last day of the year but the register will show a zero balance. I don't think there is any doubt whatsoever that there are no assets in the plan. As CuseFan notes, the IRS has clearly stated that taxation is based on the year checks are written, and I believe, firmly, that that logic follows through to all reporting. No way would I waste my time and/or my client's money on preparing a return for a year after all assets were distributed by check just because a check wasn't cashed.

I don't think you have ever told us what the DB plan provides as to an insured death benefit. What is the plan PROVISION with regard to insurance in this DB plan? What might provide some useful ammunition. Also, FWIW, a DB plan cannot provide "key man" insurance (unlike a profit sharing plan).

Probably wouldn't hurt to ask local HR. A careful review of the SPD (e.g., the identity of the "Administrator," or "Plan Administrator," and how to contact) should reveal what you need.

For B-org groups the proposed reg 1.414(m)-2(c)(1)(iii) says that the B-org must be owned at least 10% by members of the "designated group" which includes HCEs, officers, and common owners. I need to double check on the A-org specifics. I am reading contradictory information in two different sources. I'll update this post when I figure it out.

There are a lot of issues to consider in making an ASG determination. Who is the common law employer of the non-equity partners? How the report their income is not necessarily determinative for this purpose. If the CPA firm has primary direction or control over their work, then they may be considered common law employees of the firm even if the firm does not give them a W-2. If they are common law employees of the firm, then there is likely an ASG even though there is no common ownership, because the ASG rules require that the A-org or HCEs of the A-org must have ownership in the FSO (or, if treating the firm as the FSO and using the B-org rules, that the B-org be at least 10% owned by the FSO or HCEs of the FSO) - assuming of course that the individuals in question have compensation high enough to be considered HCEs, which it sounds like a "non-equity partner" probably would. Edit: HCE ownership does not apply for A-orgs

ESOP Guy, thanks for pointing that out. If we're talking about fictions in the qualified plan world, the most pervasive one is easily that your 401(k) account is "yours," since it is of course, legally an asset of the plan under the control of a trustee. Given that the trustee is obligated to use that asset solely to provide benefits to benefits to you or your beneficiary, it is expedient (not to mention good marketing) to refer to it as "yours," but there are definitely situations where the distinction becomes important.

fmsinc - all of the links you posted describe one way of accounting for participant loans. This is a common way to do it, especially on daily valuation platforms where each participant's account is segregated from all others in the plan, and they all choose their own investments. These platforms are very popular and account for the vast majority of 401(k) accounts in existence today which is probably why all of the articles assume that is how the reader's plan is set up. In a pooled plan however a participant loan can be treated like any other plan investment, and the earnings on that investment (in other words, the interest paid on the loan) are just part of the plan's overall earnings for the year, which would be allocated to each participant's account in accordance with the plan's procedures for allocating earnings, which may or may not allow for interest on participant loans to be credited back to the account of the person whose account balance is securing that loan. To the original question though, I wonder if the short period of time between the date of termination and re-hire has anything to do with it? If account only contains deferral contributions, the employer might not want to be in a position of distributing those contributions if the employee is under 59-1/2 and still employed at the time the loan is being offset. Jaclyn, the law allows (but employers are not required to provide) for a suspension of loan payments for up to 1 year during an unpaid leave of absence, with the missed payments during the unpaid leave to be made up upon return to work, or re-amortized over the term of the loan. I'm not sure if your situation fits this, but maybe they would allow you to make up just the payments that you missed while you were not working (with interest), and then resume payments on the original schedule?