Terminating a one person 401-k

[Guest Bob Monte]

I have a one person 401-k. I wish to terminate this plan on 12/31/04 and start a SIMPLE with some employees as of 1/1/05.

What do I have to do to terminate the 401-k? Do I have to file that huge 5310? The custodian told me to file a 5500, but I have never had to file before (plan assets about $55,000).

And since this is a self-employed situation, can I contribute to the plan for 2004 up to the filing deadline in 2005 even if I have already termnated the plan?

[bzorc]

The instructions to Form 5500-EZ indicate that you have to file a return in the year in which the plan liquidates. Therefore, even if you haven't filed before, you should in the final year.

[Blinky the 3-eyed Fish]

Since you seem to be going this alone, I would ask if you have received proper advice to determine that a SIMPLE is best for your situation? But assuming that you know it to be the correct path, yes, you can contribute for 2004 and yes, you have the normal contribution deadlines.

To actually terminate the plan you need to have a resolution/decree of some sort stating the plan is terminated as of X date. You also need to make sure the plan is compliant with all current legislation. You should be fine since you would have had to adopt a GUST II document, EGTRRA and 401(a)(9) amendment in 2002 or 2003. You don't have to file a 5310. Submission to the IRS is optional.

There are other detailed issues. My advice is to pay someone a few hundred dollars to walk you through all the pitfalls.

[Guest Bob Monte]

As to bzorc's statement that I have to file a 5500 because of plan liquidation:

I am not liquidating; all assets will remain in the 401-k, but there will not be additional contributions nor will the new employees be offered enrollment. To my way of interpreting things, this is a termination not liquidation. ????????????

Am I right? Is the 550 still needed?

[david rigby]

Generally, "termination" means a plan ceases to exist. To accomplish this, all benefits are distributed, or "liquidated" in your terminology.

Perhaps you merely want a "frozen" plan; ie, just stop contributing to it.

I like Blinky's suggestion to get some non-biased advice.

[Bird]

Generally speaking, you can't "terminate" and then not "liquidate." On what basis would you not "offer" enrollment to the newly eligible employees? Assuming your decision to go with a SIMPLE is a good one, and I make no comment on it, you are best served by getting rid of the 401(k). If not, you have to maintain the document, which means amending or restating it as needed, and you'd have to file a 5500 if and when those employees become participants, even if they have no money in the plan. And the IRS generally expects assets to be distributed ("liquidated" although I wouldn't ever use that term except that it's been injected here) within 12 months of termination, unless you're waiting for a favorable determination after filing a 5310. I'm probably missing something but that should be enough.

[Guest Bob Monte]

I think I am now completely confused probably due to my misuse or misunderstanding of the terminaology.

I have a one person 401-k. All the money in it belongs to me. I currently have no employees but anticipate hiring shortly after Jan 1. Analysis shows that a SIMPLE will serve my needs as far as the amount I expect to actually want to put into the plan and maximizing the benefit/cost ratio in my favor.

I am not legally able to have this 401-k plan and a SIMPLE at the same time so the 401-k must be terminated, ended, froze, whatever. The basis upon which I will deny my new employees entry to this old plan is because it is terminated, froze, whatever since I neither what to nor am I legally able to continue it.

To me liquidation and distribution mean the same; removing the money in the plan. I see no reason to do this. What would I do with it? Why can't it just stay in a terminated/froze/whatever plan?

Since I have not have to do any reporting to the IRS or the employees (of which I am the only one) how can I have to report anything now or how could I possible be out of compliance. The CPA determined my maximum total inflows and I never even maxed that out in any year.

I just want to stop this plan so I can start a SIMPLE.

[Bird]

Bob, you need to terminate the plan and roll over the assets into an IRA.

Could you "freeze" it? Maybe; as long as you are not accruing benefits then I don't think there are non-discrimination problems. But simply stopping contributions is NOT freezing! If you just stop contributing, you still have eligibility provisions that will allow other employees to become participants (they ARE participants even if they are not contributing!!!) and then you have to start filing tax returns. Freezing the plan would require an amendment that says "no one is eligible after xx/xx/xxxx."

It sounds like you're frustrated and I don't blame you. Talk to the broker, mutual fund or CPA who told you this was easy.

[Belgarath]

Bob, I'd remember the old adage, "free advice is worth what you pay for it." That includes the free advice I'm about to post!

I agree with what the other folks have posted, but the comment likely to be the most helpful to you is Blinky's. Hire someone who knows what they are doing!

$55,000 is a lot of money. At least to me. I doubt you would consider closing a real estate deal, for example, for 55K without engaging the services of an attorney. Maybe you would, and more power to you. But it shouldn't really cost you that much to find a local CPA, TPA, attorney, etc., to guide you through this. It is indeed likely to be, for someone versed in these matters, a pretty easy process. But it also is impossible for any of us here, without knowing your plan or documents, to be certain of that. I will say that I've seen many, many, many disasters on these "easy" one-person plans that are administered or terminated improperly. I'm not suggesting that you aren't capable of handling it yourself, but I am suggesting that the possibility of a problem is much greater. Is it worth the risk?

Good luck to you with whatever approach you choose!

[Blinky the 3-eyed Fish]

I currently have no employees but anticipate hiring shortly after Jan 1. Analysis shows that a SIMPLE will serve my needs as far as the amount I expect to actually want to put into the plan and maximizing the benefit/cost ratio in my favor.

And to illustrate that point of needing some competent advice is this comment. Bob, you can have a 1-year eligibility requirement for a 401(k) plan, which would mean those hired after 1/1/05 would be not be eligible until 2006. If you are trying to "maximize the benefit/cost ratio" in your favor why are you so quick to get rid of this plan? It can go another year and just benefit you, which is a 100% ratio according to my math. Also, you could have a 2-year wait for the PS portion.

[mbozek]

Bob : You can terminate the plan by taking what ever action is required under the plan document such as adopting a resolution if employer is a corp. You need to get a termination package from the 401k prototype sponsor to adopt all plan admendments necessary for 2004 and other instructions such as the need to file an 5500EZ form for the year in which the assets are distributed. Read pub 560 which is available on the IRS web site (irs.gov) for the rules for contributing to a SIMPLE plan if you have maintained a qualified plan and you can get both the instructions and the 5500 form at the same site. After termination you can roll the distribution to an IRA. Requesting irs approval of the termination of the plan is optional and you should discuss the need to file a 5310 form with your accountant if you are the only participant and the IRS has issued a favorable determination letter to the Ptype sponsor.

If the above procedure is too much of a hassle you can amend the 401k plan to close it to new participants as of 12/31/04 and leave the assets which you have acumulated in the plan and not make further contributions. However you will have to pay any fees and expenses associated with the administration of a 401k plan and amend the plan for future changes in the tax law. If you follow this procedure you can borrow from plan assets which you cannot do in an IRA.

[Bird]

Just to clarify and pile on, I would strongly recommend that you find and pay someone to help you through the termination and final filing if that's what you decide to do.

Look in the yellow pages under "pension and profit sharing." Make a couple of calls and explain that you want someone to do some hourly work on a one-man plan termination.

Good points are made that you might want to put this off for a year, and also that you can borrow from a plan but not from an IRA. Sitting down with someone will help you sort it all out.

[jquazza]

Bob, you need to terminate the plan and roll over the assets into an IRA.

If Bob maintains a successor plan, shouldn't he be prevented from taking a distribution and rolling it into an IRA.

Why couldn't he restate his one-man K into a Simple(k)?

[Guest Bob Monte]

I want to thank everyone for helping me out. And it is helping. My thoughts on some of the ideas follow.

Getting help from the sponsor. Without going into detail, I have about zero level of confidence in anything they tell me. Advice from a specialist would be good provided that person is competant.

Maintain 401-k vs Rollover to IRA: Availability of loans from 401-k is a definite plus. More importantly; I cannot make my final contributions until after Dec31 when my bottom line is determined. So I cannot convert to an IRA before that but I have to lock out the new employees before then. Even if only for a few months, I still have to solve the "freeze" question.

Modifying the 401-k to keep out the new employees and running it for another year is excellent and I may do that but I will be facing the same problem next year, with maybe more complications than now.

Overall, the fog is lifting. I think I now understand it and all my options. I know everyone wants me to see a pro and that is good but let's face it for a few hundred bucks would they go though all my options. etc. or just give me a easy-for-them solution that may not be in my BEST interest. This board, or I should say, the people here, have been a huge help in arming me with the knowledge to talk with a pro intelligently.

Do you all get the impression that I am not real trusting. You bet; been lied to and/or misled by incompetents too much

[GBurns]

You have 2 problems which you should always keep in mind.

Advisors give advice. Like all advice it is an opinion. Opinions can be biased and can be unsupportable or irrational. As a result you take the advice and evaluate it then make YOUR own decision not theirs. Remember they cannot lose only you can.

Competence is not a result of any credential or even experience. So no matter what or how many pieces of the alphabet are placed after the advisors name, he/she is only human. To err is human. A referral is also no guarantee of anything.

Select advisors carefully. Do not rely on any single opinion. Take all opinions at face value with a grain of salt. Do your own home work. Then evaluate the opinions/advice and make an informed decision.

Reflect on what has happened to you before and do not let it happen again.

Good Luck.

[Guest erepper]

Is freezing sufficient if he wanted to start a SIMPLE in 2005? I thought that a qualified plan could not be in existence at any time during a calander year there exists a SIMPLE. If it is frozen rather than terminated and all assets distributed, wouldnt that not meet this requirement?

[Bird]

The full language about another plan existing is something like:

...the Employer may not maintain anyother qualified plan with respect to which contributions were made, or benefits were accrued...