Uni-K to Corp 401(k) Plan

[PMC]

Two sole proprietors each of whom maintained a 401(k) - Uni-K. They have since formed a new S-Corp and now want to establish a new 401(k) for the S-Corp and its employees.

Question - do you think it best to terminate those Uni-K plans and do a direct rollover to the new S-Corp 401(k)? Or merge the existing 2 Uni-K plans into the new S-Corp plan? I understand the net effect will be the same for the former SPs but everything communicated to me so far has been "merging" the plans but I'm a little leery about the shape (document/amendment wise) of those two Uni-K plans and would rather suggest establish the new plan, make sure the existing Uni plans are compliant, terminate them and affect rollovers to the new plan? Any thoughts either way? Thanks

[austin3515]

You can't terminate a 401k plan, and then turn around and start a new one the next day. Because there is a "successor plan" within 12 months, there is no distributable event created by terminating the Plan.

So merger is your only option. The only substantial difference in the outcomes is the distribution restrictions which unfortunately will need to be preserved.

[masteff]

Of course could probably use the regs for eliminating optional forms of benefit to synchronize the two plans beforehand and hopefully not have it be too big a mess in that regard.

[PMC]

Austin - but it wouldn't be the same employer (2 SPs) terminating the Uni-K plans that is establishing the new 401(k). You still see a problem?

[JanetM]

Restate on of the uni plans to reflect new s-corp plan and merge the other plan into it.

[austin3515]

It is still the same employer - the fact that two sole-props choose to incorporate together doesn't change the fact that they are still employed by the same econominc entity (that's the best way I can describe it). The IRS was careful to draft its rules so that changing the form of a business would not affect application of the rules.

OK, let's say one guy is a landscaper, and the other guy is a lawyer in their respective schedule C's. They both form an S-Corp together to manufacture widgets. Then, I suppose you could terminate the uni-k's and roll the balances to the new plan (though this might be scrutinized under audit).

Converseley, if they were both lawyers, and they both incorporate together to practice law, then they are both working for the same employer.

Does this example make the point about "economic entity" more clear? I think it does...

[PMC]

Understand. Thanks for the responses.

[Bird]

I don't think it's the same employer; I think that's determined by the controlled group rules and each individual sole prop is not part of a controlled group with the new corporation. That said, I would still look to amend or restate one plan and merge the other into it, or do a new plan and merge both into it.

[austin3515]

Darnit Bird's right, it is based on CG rules (I looked it up). Sole Prop owns 100% of his own business, and just 50% of the other. To be brother sister controlled group, he would need to own at least 80% of the S-Corp.

Over the years I've learned never to ignore the ASG rules--but I can't see how a defunct Schedule C and a new S-Corp could ever fall into an ASG situation.

In light of this "new information" I actually vote for terminating the old plans. That way the money is rolled in with no distribution restrictions. Plus, the problems of either of the old Sole Props' plans won't affect the other partner. PLUS creating one new plan is just easier.

I vote termination.