New Plan or Restatement?

[Guest steve55]

I am the only employee of an S corp and also generate income from a schedule C. In 1989 I established a profit sharing plan (#1) and money purchase plan (#2). Through 2001 contributions from the C and S were being made into one profit sharing plan and one money purchase plan as shown above.

In 2002 the money purchase plan was terminated with balances rolled over into an IRA. Effective 1/1/02 an indivdual 401k plan was established and fully funded by contributions from the S corp.

Now the question:

When the 401k was established I checked the new plan box on the adoption agreement and used a new plan number (#3) for the 5500 EZ. It looks like I should have listed this as a plan restatement and not used a new plan number.

Am I ok with what was done?

Is there anything I should do at this point if a correction is needed?

Can IRS disqualify the 401k and or the profit sharing plan because of this?

Thank you for your help. This has been costing me some serious sleep deprivation.

[stevena]

Did you add a deferral feature to your existing profit sharing plan (#2), or did you actually open up a whole new plan (#3)?

I don't know why you would need a restatement?, you could have just amended the profit sharing plan (#2) to add an employee deferral feature. Theres no need to start another whole plan, all that does is add another 5500 that you now need to file.

Did you update the profit sharing plan (#2) for GUST & EGTRRA? That would be a required restatement.

[K-t-F]

As stated, you are not in trouble... you just have established 3 plans. It could have been done easier but no harm done. And yes, are you plans in compliance with GUST and EGTRRA?

[Guest steve55]

I opened a separate and new plan #3 for the 401k and did update plan #2 for GUST & EGTRRA. The only choices on the adoption agreement for the 401k was New Plan or Restatement.

[stevena]

I would say no big deal, but merge those plans together and only have to do one 5500! Why make more work for yourself? Merge plan #2 into plan #3. You only need an amendment to plan #2 which is so short and easy to do. (you should have something to work off of with your amendment to terminate the Money Purchase Plan...just change the wording a little)

And if you want to change the plan in the future, just pay someone to draft an amendment to your adoption agreement instead of filling out a whole new adoption agreement and opening a new plan. Have someone do it who knows what they are doing, (generally it is brokers who will tell you to open whole new plans becasue they are not familiar with documents.)

I just took on a new case and they have five outstanding plans...its nuts!!

[Bird]

Steve55, did you continue to file a 5500-EZ for the profit sharing plan (#002 if I understand correctly)?

If so, no problem, you can continue to run two plans or merge the PS into the 401(k) as suggested.

If not, then it looks like you have two missing returns (02 and 03) to file. There are late filing penalties, but in my experience, you can get them waived.

[Appleby]

I don't know why you would need a restatement?, you could have just amended the profit sharing plan (#2) to add an employee deferral feature.  ...

As steve55 indicated, that was the only logical choice on the adoption agreement. For instance, a prototype plan generally has two options, which are:

1) This is a new plan effective this year or

2) This is an amendment and restatement of an existing plan.

Option 2 would not necessarily be limited to an amendment and restatement due to legislative changes such as GUST, but would also be used if the employer is changing prototype sponsors or amending features under the plan- I know, it seems somewhat misleading and maybe should have been amendment and/or restatement perhaps?

It appears the route that should have been taken was to amend and restate plan # 2, by adding the salary deferral feature, by completing the adoption agreement for the Individual (k) Plan…as it stands now, merging the profit sharing plan into the Individual (k) Plan (as suggested below), seems to be the best option from all perspectives.

[Appleby]

I would say no big deal, but merge those plans together and only have to do one 5500! Why make more work for yourself? Merge plan #2 into plan #3.  You only need an amendment to plan #2 which is so short and easy to do. (you should have something to work off of with your amendment to terminate the Money Purchase Plan...just change the wording a little)

And if you want to change the plan in the future, just pay someone to draft an amendment to your adoption agreement instead of filling out a whole new adoption agreement and opening a new plan.  Have someone do it who knows what they are doing, (generally it is brokers who will tell you to open whole new plans becasue they are not familiar with documents.)

I just took on a new case and they have five outstanding plans...its nuts!!

While this seems like a good suggestion, I would be wary of choosing that option for two reasons:

1. Why pay someone to prepare an amendment when you can do it for free by completing the adoption agreement? Depending on the changes, all one has to do is copy most of the information from the original adoption agreement

2. It appears steven55 is using a prototype plan. Using documents prepared by some other party to amend the plan could result in a modification of the adoption agreement that results in the employer now having an individually designed plan, which means he could not rely on the opinion letter issued for the prototype.

Much safer to use paperwork that the prototype sponsor provides.

[stevena]

The only problem I have seen with employers doing a "do it yourself adoption agreement" (especially for a k plan) is that they do not understand all of the ramifications of the choices they make in those check boxes on the adoption agreements. Sometimes those choices have come back to bite. In the past I have thought why on earth did they pick that option? And it is usually that they didnt know any better. It has backed me into a corner on many an occasion with no choices. Thats why I would pay someone to amend the plan. Less costly in the long run. I guess in this situation, though, its only the owner, so no harm done.

Generally all the documents we have are attorneys' own documents, so paying them to amend would not go outside the prototype since it is theirs.

The ones we do have that are prototypes, we have amended by saying "the plan is amended as follows" (like I was telling him to use his Money Purchase amendment language) and we just re type all the correct boxes exactly as they are written in the prototype. I dont think that would go outside the prototype? Since the language is exact. Thats what I meant in my post. That way you dont have to fill out an entire restatement/new amendment. But I have to say, I would absolutely pay someone to do it (in most cases) since being familiar with the required boxes is necessary.

[GBurns]

Since this is a single employer single participant episode, it probably is not so bad. But what if it was not? do-it-yourself might be good for the rare person but for the majority it leads to future problems.

This Thread is an example of such problems. If a competent advisor had been used there most likely would have been no need for the thread, nor would there have been any filing penalties due etc.

Even in this simple case the penalties might outwiegh the cost of the advisor. What would have been the case if there were larger plans involved or there was already an audit in progress?

[Appleby]

The only problem I have seen with employers doing a "do it yourself adoption agreement" (especially for a k plan) is that they do not understand all of the ramifications of the choices they make in those check boxes on the adoption agreements. Sometimes those choices have come back to bite. In the past I have thought why on earth did they pick that option? And it is usually that they didnt know any better. It has backed me into a corner on many an occasion with no choices. Thats why I would pay someone to amend the plan. Less costly in the long run. I guess in this situation, though, its only the owner, so no harm done.

Generally all the documents we have are attorneys' own documents, so paying them to amend would not go outside the prototype since it is theirs.

The ones we do have that are prototypes, we have amended by saying "the plan is amended as follows" (like I was telling him to use his Money Purchase amendment language) and we just re type all the correct boxes exactly as they are written in the prototype. I dont think that would go outside the prototype? Since the language is exact. Thats what I meant in my post. That way you dont have to fill out an entire restatement/new amendment. But I have to say, I would absolutely pay someone to do it (in most cases) since being familiar with the required boxes is necessary.

OK . Thanks for clarifying. That makes absolute sense, including the the paying to amend part.

[Guest steve55]

Thank you to everyone for your insight and time. I just pulled the adoption agreement for the specific language to clarify what the 2 choices on the prototype document are:

1. Effective date: This is the initial adoption of a Profit Sharing plan by the Employer. The instructions went on to say: If this this is a new 401(K) plan, fill in the Effective Date.

2. Restatement date: This is a restatement of an existing qualified plan (a Prior Plan). The instructions went on to say: If the reason you are adopting this Plan is to amend and replace an existing qualified plan, complete this section.

I viewed this as already having a profit sharing plan and instead of expanding on an existing plan, thought it was best to create a separate plan for easy segregation and tracking should any problems present themself in the future.