One Person 401(k) when there is no salary?

[Guest Ashlea]

We had a client come to us and request to set up a one person 401(k) Plan. He has a sep. full time job, but set up an LLC in order to do day trading.

He would like to know if he can set up a one person 401(k) under this business and roll $50,000 into the plan - and then take a loan from the Plan (which he intends to pay back over the 5 year time frame).

I wouldn't think any of this would be a problem, except that he does not receive any salary through the business and other then the loan payments, he would be unable to make contributions. Any thoughts?

Thanks!

[SoCalActuary]

As a day-trader, is he receiving a K-1 showing income from the LLC as a member? Or was the LLC taxed as a corp., requiring salary for earned income. Or did the business lose money? No earned income means no 401k deferral nor company contribution.

I think you are ok to set up the plan on the expectation that he will have future income, but just accept no current contributions until they are deductible.

[GBurns]

Assuming that the plan can be set up for the LLC and that it will qualify as a business, Where will this $50,000 rollover come from? From the plan at his full time place of employment? What would be the distribution event etc?

[jquazza]

The 50k is in a SEP, the sponsor has no control over that.

[GBurns]

I read it as being that he has a sep. (as in separate) full time job.

[Guest Ashlea]

His is just starting the LLC and therefore has not generated any income. He may or may not ever generate income and therefore not be able to contribute any employer contributions or deferrals. So the question is whether or not a plan can be set up with a rollover contribution only. If he has not deferrals for say a year or 5 years - does that matter? We can set the plan up to accept deferrals if that should ever arise, but we cannot guarantee there will actually be any??

[GBurns]

What kind of plan will the rollover come from?

[mbozek]

He can establish a mp plan with a 0% employer contribution and a minimum after tax ee contribution say $20 and borrow from the rollover funds. No employer contributions would be required under the plan. I dont know if the rollover is subject to J & S if its segregated from er contributions.

[Demosthenes]

"The 50k is in a SEP, the sponsor has no control over that"

If this is a SEP-IRA why not simply trade in the SEP? If the current custodian doesn't have that ability, move the SEP to one that does, and trade away!

Setting up an LLC that day trades and then creating a 401(k) plan funded by a rollover from his IRA, then take a loan that the LLC will then trade sounds way too complicated for something that can be done in the existing account.

When things get complicated for no good reason, I start wondering what else is going on.

[GBurns]

Good point. If it is so obviously simple, one has to wonder why the question was asked. However, there could be complications regarding source of funds and qualification of the LLC as a business.

It also could be that there is no SEP, no 401(k) nor any current eligible vehicle from which a rollover can be made.

The term "rollover" might not mean rollover and although asked for clarification as to what is this vehicle/plan that the "rollover" will be coming from, Ashlea still will not say. So maybe we should not even bother to speculate as to what can be done until we know where the "rollover" will come from.

[austin3515]

The reason why not to trade in the SEP is because presumably he wants to earn a living on the income. LEt's assume then that money is from a qualified source, and the loan proceeds will be his initial capital investments.

I guess the only qualification issue that arises is permanency, because in a PS plan you need to have ongoing contributions. As mbozek implies (I think) permancy is not an issue in a MP Plan, so that should be the plan type chosen, with the 0% contribution. I'm not sure whay he says to make the $20 after tax contribution, but I'm sure he has a good reason.

So it sounds like as long as the rollover money truly is some qualified source that is eligible to rolled into a qualified plan, that this could in fact be done.

I think it's a common question because new business owners always need capital, and a participant loan is a great way to access that capital. Of course in a loan situation you need to either borrow only 50%, or put up some sort of collateral.

[Guest Ashlea]

I meant sep. as in separate full time job - sorry for the confusion. I was not the rep who spoke to the client. I simply suggested using this site to determine if a one person 401(k) plan HAD to have contributions.

I do not know where the rollover would be coming from. I need to ask the other rep and he is out of town this morning. The way I understood it was that the client had a legitimate rollover and wondered if there would be a way that he could use part of that money to help support his new business.

No one is try to do anything funny (as indicated above) - simply trying to determine if there is a way he can do this, which is why we asked the question in the first place.

[Guest Ashlea]

Thank you austin3515 and mbozek for your responses. I am unsure why some think it is a complicated thing to do. Setting up and maintaining a one person plan is not complicated at all.

[Belgarath]

Ashlea - you may scrape a few raw nerves with this one.

"I am unsure why some think it is a complicated thing to do. Setting up and maintaining a one person plan is not complicated at all."

Then why are you asking questions if it is so easy? There's a lot more to setting up and maintaining a plan then just signing a document. For one thing, being able to answer all the questions such as these, and many others, that will arise. Even the "easiest" plans usually end up with some screwball situations.

Getting beyond that, rollover funds are generally not subject to J&S requirements. See 1.411(d)-4, Q&A-3.

[mbozek]

A minimum ee contribution is required because there must be at least 1 contribution to a Qual plan other than a rollover. Some plan docs treat rollovers as being subject to J & S requirements

[GBurns]

"I am unsure why some think it is a complicated thing to do. Setting up and maintaining a one person plan is not complicated at all. "

2 of the simplest things to set up in the employee benefits arena are section 125 cafeteria plans and MERPS. Yet a few years ago MHM, which is probably the largest supplier of plans, discovered and announced that the vasy majority (I think over 90%) of the plans that they took over or looked at were not compliant. Some were never set up properly, some had document problems, and some were not maintained properly.

I suspect the same in other plans.

In looking at much over 200 hundred assorted 125, 105, 403(b), 401(k), DBRA plans in the last 8 years I cannot remember seeing 1 that did not need work, sometimes major work. I do not provide such work so I did not have any stake in the corrective work.

Ashlea,

It might seem easy and simple, but that probably can be attributed to the old saw..Ignorance is bliss.

[Guest Ashlea]

Belgarath,

Demosthenes stated: "When things get complicated for no good reason, I start wondering what else is going on."

I am not maintaining that anything about qualified plans is 'easy' I said that one person plans themselves are not complicated - as was indicated by Demosthenes to imply that something else was 'going on'. I do not feel that this question is an inapproriate one - one person plans are not so uncommonly complicated that it would automatically suggest that something must be up - otherwise why would so many people be doing it? I did not mean in anyway to suggest that I know even close to everything, but you better believe that I will defend my integrity. Thank you.

[could be me maybe not]

1. Happy New Year, Mr. Burns. For perhaps the first time, I agree with you (about the rollover).

2. Ashlea, it is readily apparent that you do not grasp the "uncomplicated" issues. "Salary", for example, may be totally irrelevant to the matter. The source of the rollover is very relevant. Whether or not this is a "business" is also relevant. It is also perhaps foolish that this be a 401(k) plan as opposed to another type. Are you aware that there are other types? The deferral limit would be combined with the employer's 401(k) plan is there is one. This is called the 402(g) limit. If not, again, where is the rollover coming from?

3. It appears that Demo was being diplomatic, not challenging your integrity. A full time employee doing day trading (for other people presumably) and setting up a company to do this, and setting up a k plan just to get at rollover money is completely ludicrous. On the surface of course. Skepticism is warranted, IMHO.

4. Feel free to invite the "other rep" to participate. Perhaps he'll/she'll understand our questions.

[Belgarath]

Ashlea - just for the record, especially if you are going to be a regular poster and we will be "conversing" in the future - I was not in any way questioning your integrity, and if my post implied that somehow, I apologize.

[GBurns]

It is not integrity that is the issue nor is it what you should be concerned about or trying to defend.

"....why would so many people be doing it? is also not the issue and neither is that all you were trying to do as per your post. The majority of individual 401(k) plans do not have an intended rollover muchless a rollover from an unclear source. I also doubt that there are many with corporate entities that might not qualify. I also doubt that there are many set up with the initial intention of providing an immediate loan.

So it does not matter that so many people are doing it. That IT is not what you are doing anyhow.

That so many people are doing it does not mean that it is being done correctly either.

And you neither understand what it is that "so many people" are doing nor what the problems are with what you suggested in your post.