Self Administered 401K Plans

[Guest John P.]

Any help with this is greatly appreciated.

If I was setting up a 401K plan (just myself, no employees), it is my understanding that I can serve as the Trustee of the plan provided it is established and maintained correctly. But there are no IRS rules which would prevent me from serving as the trustee.

Recently someone sent something to me....but I don't think it is truly in relationship to this question that suggests that an individual cannot serve as the trustee and it has to be an independent source...and I am not talking about IRAs, rather 401Ks.

I don't think this is correct but would love any feedback on this question. Thanks.

John

[ETA Consulting LLC]

No issue on the self employed plan; it happens all the time. I would suggest that if you are married, you have have your spouse as co-trustee in the event of your early demise, your spouse can merely direct the payment to her (as beneficiary). Many times in one-person plans, the owner dies and all hell breaks loose when trying to make a simple payment to the spouse, because the only trustee has passed.

If not the spouse, it's just good to have a backup trustee. But, as a legal matter, there are no issues.

Good Luck!

[Guest John P.]

No issue on the self employed plan; it happens all the time. I would suggest that if you are married, you have have your spouse as co-trustee in the event of your early demise, your spouse can merely direct the payment to her (as beneficiary). Many times in one-person plans, the owner dies and all hell breaks loose when trying to make a simple payment to the spouse, because the only trustee has passed.

If not the spouse, it's just good to have a backup trustee. But, as a legal matter, there are no issues.

Good Luck!

That's what I thought and know....at least I think LOL

However, they quoted me this from the IRS.....and I know this cannot be right as everyone that I am aware of allows this, but he is referring to Internal Revenue Regulation 11.401(d)(1)-1 and the IRS person (who I believe is wrong) said a "trustee of a 401K plan cannot be an individual because the trustee must assure the uninterrupted performance of its fiduciary duties."

Here is what I assume....this particular reference area somehow ties in with possibly another section of the code and does not reflect reality of an individual serving as their own trustee (and, as you suggested, with the preference of having the wife as a co-trustee). But, I am curious if there is anything that disputes what the IRS person said (I believe in error) or demonstrates that an individual vs. a trust or entity can, in fact, serve as a trustee.

Any assistance you can provide is greatly appreciated.

[masteff]

said a "trustee of a 401K plan cannot be an individual because the trustee must assure the uninterrupted performance of its fiduciary duties."

So you make a committe that's the trustee with the committee delegating authority to you. The committee could be yourself and your spouse (or trusted CPA or trusted atty, etc) as ETK suggested.

However you need to review the reg that the person is referring to: http://edocket.access.gpo.gov/cfr_2010/apr...401(d)(1)-1.pdf And this reg is cross referenced by that one: http://edocket.access.gpo.gov/cfr_2010/apr...cfr1.401-12.pdf

It appears that a key question is if you are an "owner-employee" as defined in 401©(3):

(3) Owner-employee

The term “owner-employee” means an employee who—

(A) owns the entire interest in an unincorporated trade or business, or

(B) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.

To the extent provided in regulations prescribed by the Secretary, such term also means an individual who has been an owner-employee within the meaning of the preceding sentence.

[jpod]

If the employer is incorporated or an LLC, there is no issue in having the sole trustee and the sole participant be the same individual. If he is unincorporated, and not even an LLC, then it is a theoretical problem because it might not be a valid trust under state law where the same individual is the settlor (i.e., the employer), the trustee and the sole participant (I am going back 30+ years but I believe this is due to the "merger doctrine"). This can be fixed, in my view, if the spouse or some other willing sole is appointed as co-trustee, even if he or she doesn't do anything.

[Guest John P.]

said a "trustee of a 401K plan cannot be an individual because the trustee must assure the uninterrupted performance of its fiduciary duties."

So you make a committe that's the trustee with the committee delegating authority to you. The committee could be yourself and your spouse (or trusted CPA or trusted atty, etc) as ETK suggested.

However you need to review the reg that the person is referring to: http://edocket.access.gpo.gov/cfr_2010/apr...401(d)(1)-1.pdf And this reg is cross referenced by that one: http://edocket.access.gpo.gov/cfr_2010/apr...cfr1.401-12.pdf

It appears that a key question is if you are an "owner-employee" as defined in 401©(3):

(3) Owner-employee

The term “owner-employee” means an employee who—

(A) owns the entire interest in an unincorporated trade or business, or

(B) in the case of a partnership, is a partner who owns more than 10 percent of either the capital interest or the profits interest in such partnership.

To the extent provided in regulations prescribed by the Secretary, such term also means an individual who has been an owner-employee within the meaning of the preceding sentence.

Thank you SO much. I also found this on the IRS site which certainly seems to suggest that an individual (self employed business owner) CAN serve as the trustee of his/her plan. I also like the suggestion of the committee which designates authority to the individual. Do you believe that this reference in IRS addresses the point? Thanks.

http://www.irs.gov/retirement/sponsor/arti...=151923,00.html

[Kevin C]

11.401(d)(1)-1 looks a lot like the non-bank trustee requirements for IRA's. I tried looking it up on our reference site and I get a message that it can not find that regulation. Considering that regulation is from 1962, is it still in effect?

I did find the following in a regulations preamble published 12/19/1995:

Background

On December 6, 1994, temporary regulations (TD 8570) under section 401 were published in the Federal Register (59 FR 62570). A notice of proposed rulemaking (bee-38-94), cross-referencing the temporary regulations, was published in the Federal Register (59 FR 62644) on the same day. The temporary regulations provide guidance on the adequacy of net worth requirements for nonbank trustees and custodians of individual retirement plans, and for nonbank custodians of custodial accounts of qualified plans and tax-sheltered annuities.

After consideration of all of the comments, the temporary regulations are replaced and the proposed regulations are adopted as revised by this Treasury decision. Because section 401(d)(1), under which §1.401-12 was originally issued, was repealed by section 237(a) of the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248 (1982), these final regulations also move all the rules for nonbank trustees and custodians that were previously in §1.401-12(n) to §1.408-2.

[Guest John P.]

11.401(d)(1)-1 looks a lot like the non-bank trustee requirements for IRA's. I tried looking it up on our reference site and I get a message that it can not find that regulation. Considering that regulation is from 1962, is it still in effect?

I did find the following in a regulations preamble published 12/19/1995:

Background

On December 6, 1994, temporary regulations (TD 8570) under section 401 were published in the Federal Register (59 FR 62570). A notice of proposed rulemaking (bee-38-94), cross-referencing the temporary regulations, was published in the Federal Register (59 FR 62644) on the same day. The temporary regulations provide guidance on the adequacy of net worth requirements for nonbank trustees and custodians of individual retirement plans, and for nonbank custodians of custodial accounts of qualified plans and tax-sheltered annuities.

After consideration of all of the comments, the temporary regulations are replaced and the proposed regulations are adopted as revised by this Treasury decision. Because section 401(d)(1), under which §1.401-12 was originally issued, was repealed by section 237(a) of the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248 (1982), these final regulations also move all the rules for nonbank trustees and custodians that were previously in §1.401-12(n) to §1.408-2.

Kevin, thank you as well as the others. Yes, I agree...from the research I have done (and just the realization that of all the multitudes out there who are doing this, it has to be fine), I agree with you. I am not worried in moving forward but was thrown that curve ball and couldn't find anything to contradict it. thanks again....it is really nice to be able to bounce questions off others.

[Guest John P.]

11.401(d)(1)-1 looks a lot like the non-bank trustee requirements for IRA's. I tried looking it up on our reference site and I get a message that it can not find that regulation. Considering that regulation is from 1962, is it still in effect?

I did find the following in a regulations preamble published 12/19/1995:

Background

On December 6, 1994, temporary regulations (TD 8570) under section 401 were published in the Federal Register (59 FR 62570). A notice of proposed rulemaking (bee-38-94), cross-referencing the temporary regulations, was published in the Federal Register (59 FR 62644) on the same day. The temporary regulations provide guidance on the adequacy of net worth requirements for nonbank trustees and custodians of individual retirement plans, and for nonbank custodians of custodial accounts of qualified plans and tax-sheltered annuities.

After consideration of all of the comments, the temporary regulations are replaced and the proposed regulations are adopted as revised by this Treasury decision. Because section 401(d)(1), under which §1.401-12 was originally issued, was repealed by section 237(a) of the Tax Equity and Fiscal Responsibility Act of 1982, Public Law 97-248 (1982), these final regulations also move all the rules for nonbank trustees and custodians that were previously in §1.401-12(n) to §1.408-2.

Kevin, thanks so much.....based on what you put in red, am I to assume that you believe that the previous reference was removed and, therefore, a bank entity is not required to be a trustee of a 401K plan? Thanks.

[Kevin C]

Sorry, but you are reading too much into my post. I have never heard this claim before, but looking at that old reg, it looks like it may have been the case at one point a long time ago. I do know that it is very common in the small plan market for the individuals, normally the business owners, to be trustees. I would ask the person who sent you the cite if they have something more recent. I find it hard to believe that pre-ERISA regulations dealing with qualified plan trustees would still be in effect.