Solo 401(k) for sole proprietor w/multiple interests

[Guest CjinSF]

I'm a civilian attempting to puzzle out answers about my own retirement plan that my accountant and current benefit providers can't answer. I haven't been able to find what I'm looking for in past posts here. I am a 100% owner of an LLC and have a SEP-IRA. I'd like to convert to a Solo 401(k) to increase my maximum contribution. I am unmarried, have no employees, and don't intend to have any. I also own a 51% interest in an unrelated LLC, where the 49% partner is not related to me. He has his own LLC where he is a 100% owner and his own retirement plan. This second LLC has substantially lower earnings than my own LLC (or my partner's own LLC). I do materially participate in it now, although I may not in the future.

If it weren't for this second LLC, it seems like a solo 401(k) would make perfect sense, as I could increase my annual contributions substantially and begin making makeup contributions when I turn 50 next year. But in reading the language of the plan document and the relevant IRC sections they reference, I am concerned that if this second LLC were to hire an employee in the future that worked more than 1000 hours per year, that person might have to be covered by my plan because of "affiliated service group" and/or "controlled group" rules.

Can one of the experts here let me know if that is a legitimate concern?

[saabraa]

I'm a civilian attempting to puzzle out answers about my own retirement plan that my accountant and current benefit providers can't answer. I haven't been able to find what I'm looking for in past posts here. I am a 100% owner of an LLC and have a SEP-IRA. I'd like to convert to a Solo 401(k) to increase my maximum contribution. I am unmarried, have no employees, and don't intend to have any. I also own a 51% interest in an unrelated LLC, where the 49% partner is not related to me. He has his own LLC where he is a 100% owner and his own retirement plan. This second LLC has substantially lower earnings than my own LLC (or my partner's own LLC). I do materially participate in it now, although I may not in the future.

If it weren't for this second LLC, it seems like a solo 401(k) would make perfect sense, as I could increase my annual contributions substantially and begin making makeup contributions when I turn 50 next year. But in reading the language of the plan document and the relevant IRC sections they reference, I am concerned that if this second LLC were to hire an employee in the future that worked more than 1000 hours per year, that person might have to be covered by my plan because of "affiliated service group" and/or "controlled group" rules.

Can one of the experts here let me know if that is a realistic concern?

Doesn't immediately look like there's any controlled group issue under code 414b and/or 414c. We'll presume you included all relevant facts, such as possible ownership attribution from or to spouses and children. The general rule for constituting a controlled group for purposes of the retirement plan rules specifies an 80% or greater ownership interest in common by the same 5 or fewer owning entities.

Affiliated groups under Internal Revenue code subsection 414(m) have more to do with functional relationships between the 2 businesses. You already said you don't serve the second LLC and presumably the reverse is true for your partner. And if furthermore there's no business relationship between the 2 businesses, you're good to go on your 401k, without concern regarding others becoming eligible. You can try to do a do it yourself determination of this affiliated service group status or lack thereof by using IRS Form 8388 and also document 7005. This Worksheet 10 and its explanation are refreshingly short, compared to some of the other worksheets. You can find these by going to the IRS website. Then click into "retirement plan community." Then click "more topics." Next, look to the right and click "determinations."

The next click is on "alert guidelines."

Finally, look at the above mentioned material.

Have a wonderful holiday season.