Company starts a new 401(k) plan

[Santo Gold]

Company started a new 401(k) plan, effective 1/1/05 for all employees. However, we've come to discover that they in fact had a prior uni-401(k) plan, effective 1/1/2002. At the time the uni-401k was adopted, the owner was the only "employee". But when he started to hire employees, her was lead to believe that the uni 401k was only good for the owner, and that to have a plan covering everyone, a new plan would be needed.

I am still awaiting a copy of the uni-401k plan document, but am I correct in that uni-401(k)s are really open to everyone (have to be)? I also realize we will have plan termination issues if the uni-401(k) was not terminated properly. But if the existing 401(k) had identical provisions to that of the uni-401(k), would that alleviate any potential problems of starting a 401(k) so soon after terminating a previous one?

Thanks

[Jim Chad]

The problem with a Uni k Plan and having employees is not legal, but practical. They are often written with immediate eligibility and 100% vesting. It may be a very simple (cheap) document which does not allow integration, safe harbor, vesting or other common features of a 401(k) Plan.

A question for the Employer that I am not sure you will like the answer to is:"Were any of the employees eligible under the old Doc, the last year the Uni k was funded?" If the anwer is yes, was there an employer contribution and was it allocated correctly?

[Guest Pensions in Paradise]

Uni-Ks (sometimes called Solo-401ks) are just marketing terms. They are the same as regular 401(k)s, the only difference being that they are usually drafted on super-simple adoption agreements, as Jim mentioned.

Remember that once the Uni-K is terminated, the owner must transfer his 401(k) account from the Uni-K into the new 401(k). He cannot receive a distribution of his 401(k) account from the Uni-K since there is a successor plan. But if he has a profit sharing account under the Uni-K he can either transfer it to the new 401(k) or receive it as a distribution.

[Bird]

I think you have to look carefully at the "uni-k" (as noted, it's just a marketing term) and see if there were any eligibility/contribution issues that need to be addressed. If not, then I'd look at simply merging the uni-k into the new plan.

[Santo Gold]

I am concerned about the eligibility of the uni-401k and the possibility that there may have been employees eligible to enter that plan. If the uni-k was properly terminated (Big IF), and the employer has already had his uni-k assets moved into most likely an IRA, would it still be OK to start a new 401(k) so soon after the first plan? And is there a problem that the owner took a distribution from the first plan, and has now started a second plan?

[Guest GoldenBear03]

Once it is determined that a plan no longer qualifies for Solo status, a traditional plan must be adopted (In other words, if an employee, other than a spouse is added). If it is further determined that a Solo plan was in place and this benefit wasn't being extended to other eligible employees, the IRS can require that the plan sponsor go back to the date of the problem's origination and fund a benefit matching his own to these excluded employees. In other words, if this went on for 3 year and he stuck $17,000 back for himself during that time, the IRS can require him to go back and provide all eligible employees with a $17,000 contribution.

[Bird]

Once it is determined that a plan no longer qualifies for Solo status, a traditional plan must be adopted

sez who?

As noted, a "solo" or "uni" k plan is a plan that is marketed to one-man businesses. There is nothing inherent in the document that would make it not qualified if other employees are eligible. It may be very unattractive to the sponsor, but that's a different matter.

In other words, if this went on for 3 year and he stuck $17,000 back for himself during that time, the IRS can require him to go back and provide all eligible employees with a $17,000 contribution.

Wow. Even if the others only made $5?

[Guest GoldenBear03]

"sez who?

As noted, a "solo" or "uni" k plan is a plan that is marketed to one-man businesses. There is nothing inherent in the document that would make it not qualified if other employees are eligible. It may be very unattractive to the sponsor, but that's a different matter."

Sez who? The IRS. If you have W-2 employees in your organization other than family members, you no longer qualify for Solo plan status. You must extend the same benefits to all employees and are not permitted to discriminate in favor of the highly compensated employees or owners. Once you hire an employee who is something other than a family member/spouse, you've lost Solo qualifying status, per the IRS' definition of a Solo plan. You're now into traditional 401(k) territory.

I see it everyday. A mom and pop shop has had a Solo plan for years. All of the sudden they hire a 22 year old guy to make deliveries for them. They're no longer qualified as "Solo" because they have a W-2 employee on their payroll, other than an immediate family member.

"In other words, if this went on for 3 year and he stuck $17,000 back for himself during that time, the IRS can require him to go back and provide all eligible employees with a $17,000 contribution.

Wow. Even if the others only made $5?"

If all they make is $5, they're not a qualified employee in all likelihood. Most plans require that in order to qualify, you must be 21 years of age, have 12 months of service under your belt and work at least 1,000 hours. If they only make a very small amount, they're likely not going to meet that 1,000 hour threshold.

[namealreadyinuse]

I'll add that a well drafted solo-k plan will require one or two years of eligiblity for this precise reason. It at least buys time to fix things if new employees are hired.

[WDIK]

Sez who? The IRS. If you have W-2 employees in your organization other than family members, you no longer qualify for Solo plan status.

Are you referring to a specific plan document, because I don't think that "Solo plan status" appears in the Internal Revenue Code or corresponding regulations?

[Guest GoldenBear03]

You're right...my language used above does not appear in the IRC verbatim. I was paraphrasing. You're correct.

[WDIK]

From what code section or regulation are you paraphrasing?