Tracking Employer vs Employee contributions in a Solo(K)

[Guest snmhanson]

Can anyone tell me if it is necessary to separately track contribution types in a Solo(K)? I'm referring to separately tracking employee deferrals vs. employer profit sharing contributions vs. rollovers from other plans. I'm not referring to Roth vs. regular contributions - which obviously would need to be tracked separately. I am firing up a Solo(K) for myself and am trying to determine if I should hire a TPA to do the administration. I can handle the 5500 reporting, but not sure I want to bother with tracking contribution types on an ongoing basis. I don't believe the 5500 requires reporting which money types are in the plan, other than the breakdown of the current year contribution. Seems to me then that once the money is in the Solo(K) plan it's source shouldn't really matter. Is this a correct assumption?

Thanks for any help!

Matt

[BG5150]

Does the plan allow hardship distributions from 401(k) amounts?

Does the plan allow for inservice withdrawals before age 59.5?

[Guest snmhanson]

Technically the plan does allow both hardship distributions as well as pre 59.5 in-service distributions. In reality though, it will never happen. In the unlikely event I find myself in a position where I need to take an early withdrawal I will terminate the plan and roll the funds into an IRA that I would be able to take distributions from. Loans are allowed as well, but once again, I will never take a loan from my 401K plan. I used a prototype agreement that offers the most flexibility to Solo(K) plans. I could probably amend the distribution options if necessary, but as I said, I will never take distributions from the plan until I retire.

However, since we are on the subject, say someone with a Solo(K) did not track contribution types but later took a hardship distribution. Would there be any issues with going back and retro-actively tracking the contribution types in order to facilitate the distribution?

Thanks!

[Kevin C]

The different sources have different rules that apply, which is why we track each source separately. Whether or not you can cut corners without it coming back to bite you in the *** will depend on how much you know about what you are doing with the plan and how lucky you are. One thing I've learned about financial plans is to never say never.

You didn't mention what type of entity you are. Contribution calculations for a sole proprietorship are more complicated than they are for a corporation. S-Corp calculations are different too.

I like to tell clients that if this stuff was easy, you wouldn't need us.

[masteff]

1) A catch on hardships is you can only withdraw employee deferrals, not earnings. So even if you kept your employee money in a separate brokerage account, you'd have to know how much was contributions to be able to take a hardship from it. http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Hardship-Distributions

2) Some investment firms offer solo k plans with basic recordkeeping for little to no extra cost (for example, Fidelity). Have you looked at those?

3) Speaking as a CPA, not as a TPA, recordkeeping the sources for just yourself doesn't have to be complicated. You could do it annually and do a ratable allocation of earnings to each source. This works well enough if your EE and ER contributions are made at the same time (whether spread thru the year or on a single date). It's less perfect if you make them on significantly different dates. A basic example of spreadsheet columns using only EE: Current Year EE Contributions, Total EE Contributions, Current Year EE Earnings, Total EE Earnings, Total Account Balance (which should match your account statement). You'd need similar columns for ER and Rollover. You'd have a row per year and just roll it forward from year to year. If you took a withdrawal, you could add a column, such as: Current Year EE Distribution.

(You can see how doing this by pay period for more than a couple of employees would get complicated to the point of paying a TPA to do it.)

[chc93]

Also, I think states tax distributions from employee contributions (deferrals) and employer contributions differently when distributed. If you don't have a breakdown, you may be taxed on amounts that are not subject to state tax, or not pay tax on amounts that should be taxed.

[Guest snmhanson]

Thanks again for the replies. I am actually a financial planner and work with a few small 401K plans, so I have a good grasp on 401K basics. However, I am on the investment side of the equation and would never try to take on the role of a TPA - I'll leave that to the experts in the field.

That said, I am comfortable with the plan design, determining maximum contribution amounts, filing the 5500, etc... I just wasn't sure about whether there is a reason that I would need to track contribution types other than for early/hardship distributions and loans. As I said, I will never take distributions from the 401K and will roll the proceeds to an IRA when I do need to start taking distributions, so I can't really see any reason to track the contribution types in my account on an ongoing basis. It's becoming clear that it is probably not necessary in my case and I will not be in risk of jeopardizing the plan if I don't.

In response to using Fidelity, or a different mutual fund company, I prefer the flexibility and efficiency of a brokerage account. In general, most mutual fund companies are going to be proprietary in terms of what they offer, or at least limit your investment options to select funds from certain fund families. Using a brokerage account gives me an extremely wide range of investment options including individual stocks and bonds, etfs, closed-end funds, etc... Once again, this is only in this particular case where I am creating a Solo(K) plan for myself. For clients, I would generally stick to established 401K providers and set them up with a good TPA.

Thanks!

[ESOP Guy]

1) A catch on hardships is you can only withdraw employee deferrals, not earnings. So even if you kept your employee money in a separate brokerage account, you'd have to know how much was contributions to be able to take a hardship from it. http://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Hardship-Distributions

2) Some investment firms offer solo k plans with basic recordkeeping for little to no extra cost (for example, Fidelity). Have you looked at those?

3) Speaking as a CPA, not as a TPA, recordkeeping the sources for just yourself doesn't have to be complicated. You could do it annually and do a ratable allocation of earnings to each source. This works well enough if your EE and ER contributions are made at the same time (whether spread thru the year or on a single date). It's less perfect if you make them on significantly different dates. A basic example of spreadsheet columns using only EE: Current Year EE Contributions, Total EE Contributions, Current Year EE Earnings, Total EE Earnings, Total Account Balance (which should match your account statement). You'd need similar columns for ER and Rollover. You'd have a row per year and just roll it forward from year to year. If you took a withdrawal, you could add a column, such as: Current Year EE Distribution.

(You can see how doing this by pay period for more than a couple of employees would get complicated to the point of paying a TPA to do it.)

What Masteff us describing in #3 is a simple balance forward method of recordkeeping. You can even add small wrinkles and keep it rather simple. For example if you make regular deposits into the trust through the year which are just 401(k) money you can give the new money a 50% weight. That assumption was the norm in balance foreward recordkeeping in the '90s and currently for the few that remain balance forward. It just has to be reasonable.

In short a simple recordkeeping system can be set up for one person on a spreadsheet.