Small Business 401k

[jsmith1985]

Hello,

Started a C corp recently and am looking to set up a Solo 401k plan as I have no employees so far.

Have the following questions:

(1) For employer profit share, do I need to have profits or can I make contribution, which is 25% of W2 wage, from reserves/capital etc.? I know the term is profit share but then it is 25% of employee compensation and not a % of profits. Hence the question.

(2) How soon after I pay myself do I have to transfer funds to Fidelity, both profit and employee contribution?

(3) What happens when I hire employees? I understand that I'll need to close this solo 401k account? what is the process? If i hire employees in the middle of the year, can I still make employee and employer contribution for part of the year?

Thanks for your assistance.

 

 

[ETA Consulting LLC]

Since you're incorporated, you would make (receive) contributions on whatever you pay yourself in W-2.  You will not use profits to calculate the amount.  Obviously, the employer contribution portion (e.g. the 25%) will come from the profits of the company.  However, that does not mean the company is required to have profits in order to fund this.  ALL that is required is that you have the W-2 on which to base the contribution. 

You really should transfer the employee contribution (e.g. the deferrals) as soon as possible after they are withheld from your W-2 pay.  So, these amounts will be funded with each payroll.  For the Employer Contribution portion, you can wait until your tax filing deadline (including extensions) to fund this.

Should you hire employees, you'd want to measure when they would actually work the 1 year of service in order to enter the plan  (on the next entry date).  You would want to have another 'full blown' 401(k) plan in place by that time; which would likely be done by restating your solo(k) plan to a regular 401(k) that accounts for the existence of employees.

On another note, the fact that you're asking these questions should scare you out of the solo(k) plan.  These plans aren't the 'walk in the park' that many salespeople would have you believe.  If Fidelity is selling you this plan, then they should be able to answer these questions and also provide you insight into questions that you haven't even thought to ask.  

Good Luck!

[RatherBeGolfing]

A solo 401(k) is just a marketing term for a one participant 401(k) plan.   There is nothing in the regulations that require you to have a special plan for a one participant plan or even to close it down when you hire employees.  Some firms add this to their documents because they either cannot or do not want to handle a plan with employees due to the testing and non-discrimination requirements.  

Do yourself a favor and establish your plan with a professional who will talk to you about plan design and how you think your business will grow.  A professional will take this into consideration and design a plan that will accomplish what you need it to do right now and at the same time not cause problems if and when you hire employees.  You may be able to save some money with the "do it yourself solo 401(k)" offered by some financial institutions, but in the long run, you will be better off with professional advice. 

[jsmith1985]

"On another note, the fact that you're asking these questions should scare you out of the solo(k) plan."

 

Hello,

Thanks for your reply.

Am not sure why I should be 'scared' of these plans. They seem pretty simple to me and Fidelity/Vanguard have done all the legwork to set these up.

Apart from the above questions (that too because of C corp) and Form 5500 if assets exceed 250K, what other concerns can one have for these plans?

 

[WCC]

In addition to what has been said, the Fidelity "solo" prototype document has a section to elect the eligibility conditions. If you hire an employee, the document can be restated, but it is not required to be. The employee will be subject to the eligibility conditions you choose. Once he/she meets those eligibility conditions, he/she is a participant and that may/will significantly change your contribution allocations.

[jsmith1985]

13 minutes ago, RatherBeGolfing said:

A solo 401(k) is just a marketing term for a one participant 401(k) plan.   There is nothing in the regulations that require you to have a special plan for a one participant plan or even to close it down when you hire employees. ... 

Hello,

Thank you for your comments.

Looking for solo 401k right now because of the ease and the total amount that I can set aside. Hence, my thought was to keep solo 401k as long as I don't have employees that will require me to have a different 401k plan.

I can definitely look at setting up a plan with assistance from a professional. The question that I have is - Can a 401k plan be set up that allows me to contribute as much as I can with a Solo 401k plan even when I have employees? Even if so, what highly-compensated calculations etc. come into the picture? 

[jsmith1985]

6 minutes ago, WCC said:

In addition to what has been said, the Fidelity "solo" prototype document has a section to elect the eligibility conditions. If you hire an employee, the document can be restated, but it is not required to be. The employee will be subject to the eligibility conditions you choose. Once he/she meets those eligibility conditions, he/she is a participant and that may/will significantly change your contribution allocations.

Absolutely correct. 

But I think other factors do come into play like if employee works over 1000 hours then you have to provide the plan to that employee, it seems that this cannot be bypassed in Fidelity eligibility conditions etc. unless I'm mistaken here.

 

[Bird]

Quote

Looking for solo 401k right now because of the ease and the total amount that I can set aside. Hence, my thought was to keep solo 401k as long as I don't have employees that will require me to have a different 401k plan.

I can definitely look at setting up a plan with assistance from a professional. The question that I have is - Can a 401k plan be set up that allows me to contribute as much as I can with a Solo 401k plan even when I have employees? Even if so, what highly-compensated calculations etc. come into the picture? 

Easy to set up but easy to set yourself up for things you don't necessarily want, if not total disaster.  e.g. you might look at the eligibility section and say "sure, immediate eligibility, of course I want to be in the plan."  That means that the second you hire an employee, they are in the plan, and you'll have to make, at an absolute minimum, a contribution of 3% of pay if you make any contributions for yourself, 401(k) or profit sharing.  And the formula for profit sharing probably says that if you make a 25% profit sharing contribution for yourself, you have to make a 25% contribution for the employee(s).  And your 401(k) contributions are subject to testing, which means if the employee doesn't contribute, you'll get a refund of all of your money (if you know enough to do that testing).  That's just for starters...

As noted, when you set up a "solo (k)" plan or whatever they call it, you are setting up a full-blown plan that just happens to be designed for a one-participant situation - typically with very liberal provisions. 

[Belgarath]

I'm a big fan of "solo-k" plans, for the simple reason that we've made a lot of money taking them over when they have been botched administratively, and either self-correction or VCP filing is required, and the investment house is no help. The fees are wonderful!

Can you establish and properly run a solo-k? Absolutely.

Will it work out, be handled properly, and will you get the good help you need from your broker/investment house? That I can't say. Be careful and do your homework, and hopefully it will work out fine. And remember that free advice over the internet, including from people like me, is worth what you pay for it.

[Kevin C]

If you are thinking of hiring employees in the near future, I would suggest you start with a regular 401(k) document and avoid one designed as a "solo 401(k)".  As noted above, when the employees would enter the plan depends on the plan provisions.  While it is just you in the plan, it will operate exactly the same way as a "solo 401(k)".  When you get employees, it is also time to start looking into safe harbor 401(k).  

 

Different service providers provide different levels of service.  Make sure the one you choose can handle the parts of the plan administration that you can't (or don't want to), especially when you add employees. That might include calculating contribution amounts, complying with deduction and annual additions limits, discrimination testing, coverage testing, preparation of Form 5500-EZ or SF, 8955-SSA.  Some companies will do all of it for you and others will only do certain parts. Their service contract will tell you what they will do. It's much easier to do it right from the beginning than it is to go back later and fix problems.

[ETA Consulting LLC]

5 hours ago, jsmith1985 said:

"On another note, the fact that you're asking these questions should scare you out of the solo(k) plan."

 

Hello,

Thanks for your reply.

Am not sure why I should be 'scared' of these plans. They seem pretty simple to me and Fidelity/Vanguard have done all the legwork to set these up.

Apart from the above questions (that too because of C corp) and Form 5500 if assets exceed 250K, what other concerns can one have for these plans?

 

I, personally, do a lot of VCP submissions to the IRS for these types of plans.  There is always a relatively simple oversight that was missed where the plan sponsor was not properly advised by someone with an active relationship of providing services to the plan.  I think the last couple of submissions were from a missed restatement deadline.  One, which was several years back, was an actual IRS audit where the plan document wasn't available; which has made me a firm believer that VCP is the cheapest route.  

But, hey, your comfort is what is most important.

Good Luck!

[jsmith1985]

52 minutes ago, ETA Consulting LLC said:

I, personally, do a lot of VCP submissions to the IRS for these types of plans.  There is always a relatively simple oversight that was missed where the plan sponsor was not properly advised by someone with an active relationship of providing services to the plan.  I think the last couple of submissions were from a missed restatement deadline.  One, which was several years back, was an actual IRS audit where the plan document wasn't available; which has made me a firm believer that VCP is the cheapest route.  

But, hey, your comfort is what is most important.

Good Luck!

 

Just to clarify, I'm not questioning you at all. I'm sure you have your reasons why stated that.

What I was wondering is -

As long as one

- sticks with reputable companies like Vanguard/Fidelity etc,

- fill up and send back the amendments as and when they are sent,

- keep all documents at one place

shouldn't that be fine or is there something that these companies miss and people have to file VCP.

Thanks

[jsmith1985]

1 hour ago, Kevin C said:

If you are thinking of hiring employees in the near future, I would suggest you start with a regular 401(k) document and avoid one designed as a "solo 401(k)".  As noted above, when the employees would enter the plan depends on the plan provisions.  While it is just you in the plan, it will operate exactly the same way as a "solo 401(k)".  When you get employees, it is also time to start looking into safe harbor 401(k).  

So, a regular 401k can be set up with a 25% wage compensation as profit share and then when one gets employees then change the plan to safe harbor and have the Profit Share at 4% or whatever the options are at the time?

Hiring employees might be something in future but not in the near future - say at least not until 2019.

Thanks for your comments.

[spiritrider]

10 hours ago, jsmith1985 said:

Absolutely correct. 

But I think other factors do come into play like if employee works over 1000 hours then you have to provide the plan to that employee, it seems that this cannot be bypassed in Fidelity eligibility conditions etc. unless I'm mistaken here.

 

The 1000 hours is an additional eligibility restriction that determines whether the one year of service has been met. This restriction can not be greater than 1000 hours. This along with the < age 21 restriction can allow you to continue a one-participant 401k plan if any employees fall into these groups. This can be useful if the only employees you hire at least initially (hint, hint, hint), are part-time < 20 hours/week and/or < age 21.

If you are going to use a self-administered one-participant 401k plan, this is not something to be casual about as pointed out be many others. So do not be lulled into a false sense of security because they seem relatively easy to set up. With the exception of an extremely small number of exceptions they receive, they are still first and foremost a 401k plan subject to the vast majority of IRS rules and regulations. This is definitely a case of what you don't know that can bite you in the butt.

[Mike Preston]

I don't mean to rain on your parade, but you really need to talk to a pension professional and let them ask you some detailed questions.  Only then can some quality guidance find its way to you.  From your perspective, the major questions you want to see answered are:

1) Do I get anything from a solo 401(k) plan I can't get from a SEP?

2) If a SEP would be better for me, why?

3) If a solo 401(k) plan would be better for me, why?

You should be prepared to answer the following questions:

1) Exactly when did you start the C-Corp?

2) What did you do before that?  Were you a W-2 employee? Or do you have a year or two or three where you were an independent contractor or self-employed?

3) In each fiscal year of the C-Corp how much has been/will be the W-2 compensation?  For years not already closed, give the answer in terms of a low to high range.

4) For years not already closed, how much would you like to see put into a tax sheltered vehicle (either a SEP or a 401(k))? Do this exercise for the current year and as many years in the future that you think you can reasonably forcast.

If whoever helps you decide what to do doesn't ask all of these questions, you need to add another question to your list: How can you guide me to design the right plan for me if you haven't asked: (insert the question not asked)?

Good luck.

[jsmith1985]

6 hours ago, Mike Preston said:

I don't mean to rain on your parade, but you really need to talk to a pension professional and let them ask you some detailed questions.  Only then can some quality guidance find its way to you.  From your perspective, the major questions you want to see answered are:

1) Do I get anything from a solo 401(k) plan I can't get from a SEP?

2) If a SEP would be better for me, why?

3) If a solo 401(k) plan would be better for me, why?

You should be prepared to answer the following questions:

1) Exactly when did you start the C-Corp?

2) What did you do before that?  Were you a W-2 employee? Or do you have a year or two or three where you were an independent contractor or self-employed?

3) In each fiscal year of the C-Corp how much has been/will be the W-2 compensation?  For years not already closed, give the answer in terms of a low to high range.

4) For years not already closed, how much would you like to see put into a tax sheltered vehicle (either a SEP or a 401(k))? Do this exercise for the current year and as many years in the future that you think you can reasonably forcast.

If whoever helps you decide what to do doesn't ask all of these questions, you need to add another question to your list: How can you guide me to design the right plan for me if you haven't asked: (insert the question not asked)?

Good luck.

Hello,

Thank you for your response.

I thought it was well established that the solo 401k was better than SEP

Solo 401k - one needs to have an W2 wage of 144K to get to the max contribution of 54K

SEP - one needs to have 216K in W2 wage to get to 54K since all 25% comes from employer, unless one has a SARSEP plan which is old version of the plan.

Please let me know if I'm missing something here.

 

For your next set of questions:

As I mentioned, started C corp recently since some clients wanted it. Had a sole-prop before and hence was familiar with Solo-401k plans.

Since I own 100% of the C-corp, would need to add this corp to my solo-401k plan as a control group.

Employees - Am not right now planning on having any. Reason I asked is to find what to do that is cost effective. As a small business, I can afford to put 25% profit share on a solo plan but that high percentage becomes difficult when one hires employees. How many people want to take a reduced salary to get a high percentage of profit-share even though it is more tax beneficial?

[jsmith1985]

I'd like to thank everyone for their comments/suggestions. It has really been a very helpful discussion with differing perspectives. Please keep them coming.

[RatherBeGolfing]

On 9/1/2017 at 5:11 PM, jsmith1985 said:

 

Just to clarify, I'm not questioning you at all. I'm sure you have your reasons why stated that.

What I was wondering is -

As long as one

- sticks with reputable companies like Vanguard/Fidelity etc,

- fill up and send back the amendments as and when they are sent,

- keep all documents at one place

shouldn't that be fine or is there something that these companies miss and people have to file VCP.

Thanks

While Vanguard and Fidelity are reputable companies, their plan documents are only as good and effective as the person who uses them.  You might look at their "solo-k" adoption agreements and think that it is very simple and just a few options to pick from.  But have you read and do you understand the base plan document that is the bulk of the governing document for the plan?  The BPD is where the plans spell out how they comply with all the applicable laws and what the plan's default positions are.  For example, the adoption agreement might let include or exclude a few items from compensation, but the BPD spells out 10 items that are included or excluded by default, and you wouldn't know what they are by looking at the adoption agreement. The adoption agreement is simply a tool that adjusts the BPD on a few points where it is flexible. 

You know that you can contribute 25% as an employer contribution, that is great.  Do you know what is included in the compensation that is used to calculate the 25%?  Not knowing or assuming that something is either included or excluded can cause you to either contribute in excess of 25% which is problem, or not contributing enough and shorting yourself.  

These are just a few examples of where it is really easy make a mistake, but also easy to prevent one if you know what you are doing.

Like others on this board, I make good money cleaning up simple plans like this after they have been screwed up.  I make very little money on the one participant plans that I actually service, but it is easy for me to keep them in line since I work with the legal framework that applies to them everyday.

Ultimately, it is up to you whether you try to do it yourself with the "free" template you get from an investment house or seek professional assistance.  You can probably even find a practitioner who will go along with using the investment house document over their own document, and only charge you for their time in designing the plan according to your wishes and keeping it up to date.  Likewise, you can probably find someone who will only charge a few hundred each year to  help you calculate your contributions, make sure they are deposited timely, other administrative issues, and government reporting that can make for an easy trap for the non-practitioner.

Good luck!

[TPAJake]

I would echo most of the warnings above regarding solo plans & advise you to go with a real 401k plan from day one, using a real professional TPA. It will save you money in the long run I promise--I too have made plenty of money cleaning up solo plans that went sideways.  

Since you're a small biz owner, I would encourage you to support another local/small biz...Not use some cheapo prototype from vanguard or fidelity.