From 401(k) to One Person Plan

[Guest Twinky]

Can a company who had a 401(k) plan with employees change to a "one-person" plan?

The employer has let everyone go. The only people left are the two owners and their spouses. However, there is one terminated participant who still has assets in the plan. It is my understanding of a "one-person" plan that they have no other employees other than the owner(s) or owner(s) and spouse(s). Since that's all there is now, could they switch it to a "one-person" plan? My next question is, if they can, how will this work for filing Form 5500? Their assets are well below $250,000. However, they have filed Form 5500 in the past, since they did have other employees. Can you go from filing Form 5500 to not filing Form 5500?

Thanks!

[SheilaD]

Can a company who had a 401(k) plan with employees change to a "one-person" plan?

The employer has let everyone go. The only people left are the two owners and their spouses. However, there is one terminated participant who still has assets in the plan. It is my understanding of a "one-person" plan that they have no other employees other than the owner(s) or owner(s) and spouse(s). Since that's all there is now, could they switch it to a "one-person" plan? My next question is, if they can, how will this work for filing Form 5500? Their assets are well below $250,000. However, they have filed Form 5500 in the past, since they did have other employees. Can you go from filing Form 5500 to not filing Form 5500?

Thanks!

As long as you have any benefit for a non owner/spouse you must file a 5500. In the year following the year in which the terminated person is paid out I believe you could switch to an EZ. The way the instructions read - once you are an EZ you will only have to file in those years that your assets exceed 250,000.

[Guest Sieve]

Twinky --

Just to clarify . . . A plan doesn't "change" from a 401(k) plan to a one-person plan. There's just a 401(k) plan which, because the employer now might have only owners & spouses as employees, is perhaps subjected to different standards/reporting requirements. But, a 401(k) plan is still a 401(k) plan, and the governing provisions are the same.

[K2retire]

Twinky --

Just to clarify . . . A plan doesn't "change" from a 401(k) plan to a one-person plan. There's just a 401(k) plan which, because the employer now might have only owners & spouses as employees, is perhaps subjected to different standards/reporting requirements. But, a 401(k) plan is still a 401(k) plan, and the governing provisions are the same.

Thank you for once again pointing out that the concept of a solo K is an urban myth!

[Guest Sieve]

K2 --

Any time!

But, as I'm sure you know, one thing that the fictitious concept does point out is that there may be reason for a solo to use a 401(k) plan in the event that compensation is less than 4 times the Section 415 limitation, because the deferral does not count against the 25% deduction limit and therefore a larger contribution/deduction is available than with a straight PSP.

Example: Comp of $100,000, only $25,000 deductible in straight PSP, but, with 401(k) added, can deduct & put away more than mere $25,000. Even with higher comp., 401(k) would still allow a catch-up despite a PSP which m ight already reach 415 limits.

In the old days, of course, the 415 limitation was 25% of comp., and deferrals counted towards the 25% deduction limitation, and there were no catch-ups, so the notion of establishing a 401(k) plan for a solo made no sense whatsoever.

[K2retire]

All good and valid points. My issue is with the folks marketing these "solo K" plans as though they are somehow not subject to all the usual 401(k) rules simply because they may not have to file a 5500.

[Guest Sieve]

Understood. And agreed 100%.

But, of course, you assume these folks have some idea how 401(k) plans really work and that they truly know there really is no difference. Probably a bad assumption . . .

[K2retire]

I don't assume that -- I know better from experience. Unfortunately the people to whom the plans are sold often assume it.

[Guest Twinky]

Thanks everyone!

Yes, I agree that it's not a switch to a one person plan. It's still a 401k plan, but the reason I stated it as such is that the client is looking into those companies who give away the plan administration for almost nothing because they state it as a "one person plan". So this client is looking at me to reduce their fees now that they could be considered a "one person plan", or as K2 called it, a solo k. I know there is no difference between the two, but I was curious as to the 5500. For instance, the 5500 is filed for 2005, 2006, 2007, and 2008. All of a sudden they are just owners and spouses. Come 2009 and no 5500 is being filed (because the assets are under $250,000), you can bet they would get a letter from the IRS for late or non-filing.

As well, I could reduce my fees some if no 5500 would be required.

I'm half tempted to just say to this client, "see ya and good luck". ha!

[K2retire]

I read others who suggest filing a 5500EZ the first year that there is only one participant. Then if the assets are below the threshold you can quit filing.

One is always tempted to remind such a client that you often get what you pay for. I've seen many plans that thought they were getting something for free pay hefty fees to correct what the other provider failed to mention.

[401king]

The biggest reason we do reduce costs on solo-k's, or uni-k's (or any of the others), is because they always pass discrimination testing. Dump in the numbers, pump out the results. We even file the 5500's for them regardless simply because they are EZ-er to fill out for uni-ks.

[Guest Twinky]

Thanks!

I agree that we could reduce our fees based on a 5500EZ and testing.

I also agree with K2, and I did tell them when looking at other provider(s), to be sure to look for hidden fees (such as the document fee and 5500 filing (since only the annual admin fee was quoted)).