Indvidual (k) Question

[Guest EAS]

I realize the "Individual (k)" is used when a small business owner establishes a plan covering only th business owners (or owners and their spouses). If the business eventually hires employees that must be covered under the business's retirement plan the business owner must generally decide to expand their Individual (k) plan into a traditonal 401(k) plan or switch to a different type of business retirement plan.

Once the employer has eligible employees does the Individual (k) automatically beome frozen? How much time does the employer have to establish a traditional 401(k) plan? Please advise.

Thank You

[Earl]

Think of the plan as an umbrella. The umbrella is "401(k) Plan" not "Individual K".

When one person is standing under the umbrella you have an individual K.

Look at the document of the 401(k) Plan and see what the eligibility requirements are.

The plan would only become frozen if the owner stopped making deferrals because he has a Top Heavy plan and will have to make a Profit Sharing contribution to the employee once that employee satisfies the eligibility requirements of the 401(k) Plan whether the employee defers or not.

[Appleby]

…and, if non-owner employees are eligible to participate in the plan for any year, the employer is not eligible to maintain the individual-k plan for that year…the plan would not be frozen, but would be amended to a regular 401(k) plan. This may be accomplished by completing a different set of documentation, where the appropriate elections, such as testing elections, eligibility requirements, vesting etc… are made

[austin3515]

Appleby, I think as Earl implied you turn to the eligibility requirements. IF employees meet the requirements they are in, no amendments necessary. I'm not sure why they'd be ineligible to maintain it when they have employees. Remember, this is just a 401(k) like any other (except that it has no employees, which is really not much of a difference).

[GBurns]

austin3515

If they maintain the "Individual" plan while having the "employee" plan that seems to be the same as a single employer having 2 401(k) plans at the same time. Are you saying that is allowed?

[jquazza]

Gburns,

Having multiple plans is ok as long as you remain cognizant of the coverage rules. The problem with individual (k)s or Solo(k)s is not from a compliance perspective, but from the vendor's. Most vendors won't allow sponsors with employees (other than the self-employed individuals) in individual (k)s. These vendors have set very low fees for these plans and having to aggregate an individual (k) with another plan would complicate the compliance testing and increase their cost, thus not worth the few hundred dollars they charge for an individual (k).

[Appleby]

Appleby, I think as Earl implied you turn to the eligibility requirements. IF employees meet the requirements they are in, no amendments necessary. I'm not sure why they'd be ineligible to maintain it when they have employees. Remember, this is just a 401(k) like any other (except that it has no employees, which is really not much of a difference).

Austin, from a general perspective, you are right…but even though the individual-k is just a 401(k) plan, we must consider the target market, and the way the product was designed for that market segment-as Jerome indicated. An employer with non-owner employees who are eligible to participate in the 401(k) plan –technically-would not be eligible for the individual-k plan, because the premise of the individual-k plan is that no ADP, ACP, Top heavy testing is required because the plan covers only owner-employees. Under the individual-k plan, employer contributions are usually immediately 100 percent vested and participants usually become eligible for profit sharing contributions after only 1 year of service or less. As such the adoption agreement for the individual-k plan is void of (or have limited) options where an employer would usually make testing, eligibility other elections…

An employer who has non-owner employees that are eligible to participate in the plan would usually complete a more complex/detailed adoption agreement, where he/she can make ADP, ACP and top heavy testing elections that would apply to the plan as well as stricter eligibility requirements, vesting schedules etc.

In most cases, the individual-k adoption agreement is a 2-3 page document, whereas the regular 401(k) adoption agreement is much more.

It’s more design than regulatory. It’s the prototype sponsor saying unless you fit a narrowly defined mold, you are not eligible to use the individual-k plan.

The regular 401(k) adoption agreement can be used for an employer where the plan covers only the business owner…but why complete a 20 page document, where a 3 page document would do the job?

The financial institutions that offer the individual-k product flags them as such for various reasons, including allowing their staff (customer service department and such) to focus only on the rules that would apply to that plan when responding to related questions, as opposed to the numerous rules that applies to a regular 401(k) plan.