Self Employed 401k -Multiple Plans Issue

[SJones]

Hello,

Found this site while googling for my scenario and seems people here know what they're talking about.

Had a Self-Employed Plan for my LLC (no employees) with Vanguard for past 4 years, over 50, making max contributions.

While talking to Fidelity after opening plan with Vanguard, they suggested I open another plan with them to take advantage of "brokerage' feature in their plan (Vanguard did not provide that). So I opened another plan with them - 002, Vanguard was 001.

Now, I'm told that with the 002 plan assets exceeding the limit I need to file 5500 next year. Do I need to file 5500 for both 001 and 002 or just 002 where assets have exceeded the limit?

In order to make my life simple, I'd like to close the 001-Vanguard plan, move everything to Fidelity since after an initial contribution to vanguard when I first opened the plan I've been making contributions only to Fidelity-002 plan.

Could someone please let me know what is the best way to do this and what paperwork other than 5500 (termination of plan) do I need since there are no employees, just myself?

Thanks for the assistance.

 

[RatherBeGolfing]

27 minutes ago, SJones said:

Now, I'm told that with the 002 plan assets exceeding the limit I need to file 5500 next year. Do I need to file 5500 for both 001 and 002 or just 002 where assets have exceeded the limit?

I assume you are talking about the $250,000 limit?  If so, that is the combined value so it would mean you have to file for both if the combined assets exceed $250,000.

From the 5500-EZ instructions (my emphasis)

Quote

Who Does Not Have To File Form 5500-EZ

You do not have to file Form 5500-EZ for the 2016 plan year for a one-participant plan if the total of the plan's assets and the assets of all other one-participant plans maintained by the employer at the end of the 2016 plan year does not exceed $250,000, unless 2016 is the final plan year of the plan. For more information on final plan years, see Final Return later. Example. If a plan meets all the requirements for filing Form 5500-EZ and its total assets (either alone or in combination with one or more one-participant plans maintained by the employer) exceed $250,000 at the end of the 2016 plan year, Form 5500-EZ must be filed for each of the employer's one-participant plans including those with less than $250,000 in assets for the 2016 plan year. CAUTION ! Note. You should use the total plan assets as listed as of the end of the plan year on line 7a(2) of this form to determine whether the plan(s) assets exceed $250,000. If an employer maintains one or more one-participant plans, the total assets of all one-participant plans combined must be counted towards the amount of $250,000.

 

31 minutes ago, SJones said:

Could someone please let me know what is the best way to do this and what paperwork other than 5500 (termination of plan) do I need since there are no employees, just myself?

Talk to Vanguard, they will have required paperwork to terminate the plan.  You also need to file a final Form 5500-EZ and Forms 1096/1099/945 depending on how you distribute the assets (Make sure to ask Vanguard if they will do this for you)

Just as an FYI, Vanguard also has a brokerage option that may work for you, I have some clients who love them. I'm not sure if they can be used as part of their one participant plans though.

I hope that helps.

 

[Bird]

33 minutes ago, SJones said:

While talking to Fidelity after opening plan with Vanguard, they suggested I open another plan with them to take advantage of "brokerage' feature in their plan (Vanguard did not provide that). So I opened another plan with them - 002, Vanguard was 001.

Now, I'm told that with the 002 plan assets exceeding the limit I need to file 5500 next year. Do I need to file 5500 for both 001 and 002 or just 002 where assets have exceeded the limit?

In order to make my life simple, I'd like to close the 001-Vanguard plan, move everything to Fidelity since after an initial contribution to vanguard when I first opened the plan I've been making contributions only to Fidelity-002 plan.

Could someone please let me know what is the best way to do this and what paperwork other than 5500 (termination of plan) do I need since there are no employees, just myself?

Yes you need to file returns for both plans.

I think most of us here would "merge" the plans but it might be easier for you to "terminate" plan 001 and then roll over the money to plan 002.  Form 5500 (either SF or EZ) is the annual reporting form, and you do have to file one for every year there are assets in a plan once you are over the $250K threshold. 

FWIW Vanguard has brokerage options...

[SJones]

4 minutes ago, RatherBeGolfing said:

I assume you are talking about the $250,000 limit?  If so, that is the combined value so it would mean you have to file for both if the combined assets exceed $250,000.

From the 5500-EZ instructions (my emphasis)

 

Talk to Vanguard, they will have required paperwork to terminate the plan.  You also need to file a final Form 5500-EZ and Forms 1096/1099/945 depending on how you distribute the assets (Make sure to ask Vanguard if they will do this for you)

Just as an FYI, Vanguard also has a brokerage option that may work for you, I have some clients who love them. I'm not sure if they can be used as part of their one participant plans though.

I hope that helps.

 

Thanks, So I guess I will need to file a 5500 for both plans.

Since I'll be transferring all assets from a 401k plan from Vanguard to Fidelity (Trustee to Trustee if I'm using the term correctly) there shouldn't be any paperwork involved as far as transfer is concerned or am I mistaken.

FYI - Vanguard did not allow Brokerage in Solo 401k, do not know if that has changed now. but since most assets are with Fidelity, I'd like to continue with Fidelity.

Thanks for your assistance.

 

[SJones]

4 minutes ago, Bird said:

Yes you need to file returns for both plans.

I think most of us here would "merge" the plans but it might be easier for you to "terminate" plan 001 and then roll over the money to plan 002.  Form 5500 (either SF or EZ) is the annual reporting form, and you do have to file one for every year there are assets in a plan once you are over the $250K threshold. 

FWIW Vanguard has brokerage options...

Thanks for your assistance.

Yes, was thinking of moving assets to 002 and then terminate 001 and make my life easy.

As I mentioned, Vanguard Brokerage was not allowed in Solo 401k Plans when I opened the plan. I don't know if that has changed but really does not matter now since most assets are in 002 plan.

 

Thanks again for your assistance.

[SJones]

Looked at the transfer and it seems that it would be easier if I have Fidelity initiate the transfer, then ask Vanguard to terminate the plan.

 

And as @RatherBegolfing mentioned - hoping that Vanguard has the paperwork/steps to terminate the plan.

Thanks, 

[Bird]

2 hours ago, SJones said:

Looked at the transfer and it seems that it would be easier if I have Fidelity initiate the transfer, then ask Vanguard to terminate the plan.

If that works, good for you.  I'm not sure it will be as easy as that but see what happens.

(Technically, you are skipping some bases.  If you transfer money from Vanguard (001) to Fidelity 002), what is the basis for the transfer?  You're ahead of the game if you transfer the assets before you terminate the plan, but if you terminate the plan, I imagine Vanguard will insist on you filling out their forms for a distribution.) 

[SJones]

@Bird - If you can let me know what bases I'm skipping then I can certainly take a look at them and see.

What issue do you see if I transfer assets first then terminate the plan? Anyhow the transfer will be reported on 5500.

Thanks again for your assistance.

[Mike Preston]

Two issues.  

First, since you have been blissfully ignorant of the requirement to aggregate plans for the $250,000 threshold, please go back and make sure there hasn't been a requirement to file for a past year that you have missed. You can easily correct it (or hire somebody to do it for you) without too much expense, but if you let the IRS find you there is a potential penalty of $15,000 for each year not filed.  Yes, it is unlikely that the IRS would come down so hard on a late solo filer, but why take the chance?

Second, and this is most unusual, stick to your guns in the face of some potentially inaccurate advice given above (which could have disastrous consequences for you). You have it right: you should be transferring the assets of 001 into plan 002 in conjunction with a formal termination of plan 001 or merger of plan 001 into plan 002.  This is an "employer" action, not a participant directed action.  DO NOT FILL OUT PARTICIPANT DISTRIBUTION PAPERWORK FROM PLAN 001 as that would imply a rollover of funds from 001 to 002.  While it may be permissable for you to do that (if you are over age 59 and 1/2 and the plan allows you the right to take a participant distribution at will), again, why take the chance when the course of action you have embarked upon (transferring) is bullet proof?

[SJones]

1 hour ago, Mike Preston said:

Two issues.  

First, since you have been blissfully ignorant of the requirement to aggregate plans for the $250,000 threshold, please go back and make sure there hasn't been a requirement to file for a past year that you have missed. ...

Second, and this is most unusual, stick to your guns in the face of some potentially inaccurate advice given above (which could have disastrous consequences for you). You have it right: you should be transferring the assets of 001 into plan 002 in conjunction with a formal termination of plan 001 or merger of plan 001 into plan 002.  This is an "employer" action, not a participant directed action.  DO NOT FILL OUT PARTICIPANT DISTRIBUTION PAPERWORK FROM PLAN 001 as that would imply a rollover of funds from 001 to 002.  While it may be permissable for you to do that (if you are over age 59 and 1/2 and the plan allows you the right to take a participant distribution at will), again, why take the chance when the course of action you have embarked upon (transferring) is bullet proof?

Thanks for your comments.

Assets in aggregate were not over 250K in the 2 plans last year. So I'm a bit confused on this point that you raised. Should not apply to me.

Does Fidelity have a special Form that does this "Employer Action' Transfer that you're talking about? How do I go about ensuring this? The one that I have is - "transfer-assets-to-fidelity.pdf".

So, should I then get Vanguard to handle the transfer and termination together?

In my opinion there should NOT be any distribution form etc. that needs to be created for this transaction but please correct me if I'm wrong.

Thanks again for your assistance.

 

[Mike Preston]

I agree that the filing issue doesn't apply to you if the first time your combined assets exceeded $250,000 was 1/1/2017 or later.  I just wanted you to double-check because it seemed like you were not aware of the requirement to consider the two plans together before this discussion.

One of the "advantages" of low cost services is the ability (or lack thereof) to rely solely on those providing those services.  So, check with them as to how you can accomplish your goals without negative tax consequences.  If you see anything with the word "rollover" in it, *RUN*. 

[SJones]

This is the form that Fidelity wants me to use. Do you have any concerns here?

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/transfer-assets-to-fidelity.pdf

 

Under sections 1 and 2, was told to select 'Other' and enter 'Individual 401k account' as Account Type.

 

 

Vanguard seems to be having a better Transfer Form if I was going from Fidelity to Vanguard - https://personal.vanguard.com/us/litfulfillment/ELFMainResults?cat=MAFM&subCat1=BYSL&subCat2=BMOR

 

Don't know why Fidelity does not have a form that is as explicit as the one that Vanguard has. Would be helpful isn't it? 

Thanks

[Bird]

17 hours ago, SJones said:

@Bird - If you can let me know what bases I'm skipping then I can certainly take a look at them and see.

What issue do you see if I transfer assets first then terminate the plan? Anyhow the transfer will be reported on 5500.

What I said above:  " If you transfer money from Vanguard (001) to Fidelity 002), what is the basis for the transfer?  You're ahead of the game if you transfer the assets before you terminate the plan "

[SJones]

@Bird - I think @Mike has a different opinion (if I understand correctly) and he agrees with my approach.

 

How would you recommend I do this? Just ask Vanguard to transfer assets and terminate plan? Can certainly do that as well but did not want any chance of this process being designated as "Rollover" etc.

 

Thanks,

[Bird]

16 hours ago, Mike Preston said:

Second, and this is most unusual, stick to your guns in the face of some potentially inaccurate advice given above (which could have disastrous consequences for you). You have it right: you should be transferring the assets of 001 into plan 002 in conjunction with a formal termination of plan 001 or merger of plan 001 into plan 002.  This is an "employer" action, not a participant directed action.  DO NOT FILL OUT PARTICIPANT DISTRIBUTION PAPERWORK FROM PLAN 001 as that would imply a rollover of funds from 001 to 002.  While it may be permissable for you to do that (if you are over age 59 and 1/2 and the plan allows you the right to take a participant distribution at will), again, why take the chance when the course of action you have embarked upon (transferring) is bullet proof?

Mike, since when does an employer-initiated termination of a plan provide for a transfer of assets to another plan?  I agree that a merger would involve an employer action.  And please re-read my post; the sequence suggested was 1) transfer assets and 2) terminate the first plan - there is no basis for transferring assets (!)

And what exactly is the problem with terminating the plan and then filling out distribution paperwork for a rollover? It's got nothing to do with age 59 /12 or at will distributions...

[Bird]

5 minutes ago, SJones said:

@Bird - I think @Mike has a different opinion (if I understand correctly) and he agrees with my approach.

How would you recommend I do this? Just ask Vanguard to transfer assets and terminate plan? Can certainly do that as well but did not want any chance of this process being designated as "Rollover" etc.

I would normally defer to Mike as he has more experience and frankly is smarter than I am.  But his comments are mystifying to me so I'll let him explain better if he feels like it.

I'll repeat - you can't just arbitrarily say, as a participant, I'm transferring assets from plan 1 to plan 2.  There has to be a "distributable event" - termination of employment, attainment of retirement age, etc., something that permits a distribution.  If you, the employer, terminate the plan, then you, the participant, can roll over the proceeds wherever you want, including plan 2.  If you, the employer, decide to merge the plans, then you, the employer, can indeed physically transfer assets to the remaining plan.  I'm just thinking that for a novice, a merger is trickier, document-wise, than a termination. 

But...this has really gone beyond what is reasonable for free advice; we would normally be handling this stuff for our clients.  Unfortunately Vanguard and Fidelity and their ilk make is super-easy to start up a plan but then give no support whatsoever for such procedures, and you are left holding the bag, either screwing things up or paying someone to walk you through it or muddling through with help from this board but still potentially screwing it up.  I feel like I'm subsidizing Vanguard and  Fidelity and am not willing to take it beyond a certain point, which we've reached.  I'm definitely not reviewing forms, sorry.

[RatherBeGolfing]

1 minute ago, Bird said:

And what exactly is the problem with terminating the plan and then filling out distribution paperwork for a rollover? It's got nothing to do with age 59 /12 or at will distributions...

Well if it is a successor plan you really want it to be a transfer not a distribution.  I know the end result is that the assets end up in the same place but it should be transferred not rolled over.

As for potential issues, if it is transferred over as a successor plan, the assets (should) retain their source characteristics like withdrawal restrictions on deferrals, right?  But a rolled over amount has already been "distributed" from its original plan and are now rollover assets that do not carry the same restrictions.  If assets that "roll over" incorrectly are then distributed before age 59 1/2, you have a problem.

At least that is how I am looking at it.

[SJones]

29 minutes ago, Bird said:

I would normally defer to Mike as he has more experience and frankly is smarter than I am.  But his comments are mystifying to me so I'll let him explain better if he feels like it.

I'll repeat - you can't just arbitrarily say, as a participant, I'm transferring assets from plan 1 to plan 2.  There has to be a "distributable event" - termination of employment, attainment of retirement age, etc., something that permits a distribution.  If you, the employer, terminate the plan, then you, the participant, can roll over the proceeds wherever you want, including plan 2.  If you, the employer, decide to merge the plans, then you, the employer, can indeed physically transfer assets to the remaining plan.  I'm just thinking that for a novice, a merger is trickier, document-wise, than a termination. 

But...this has really gone beyond what is reasonable for free advice; we would normally be handling this stuff for our clients.  Unfortunately Vanguard and Fidelity and their ilk make is super-easy to start up a plan but then give no support whatsoever for such procedures, and you are left holding the bag, either screwing things up or paying someone to walk you through it or muddling through with help from this board but still potentially screwing it up.  I feel like I'm subsidizing Vanguard and  Fidelity and am not willing to take it beyond a certain point, which we've reached.  I'm definitely not reviewing forms, sorry.

I'm not just transferring my 401k account, the transfer includes the whole plan. At least Vanguard has the form right for inward transfers to Vanguard. That form states:

"Use this form to transfer Individual 401(k) Plan or profit-sharing plan assets (“For Benefit Of” accounts only) from another financial institution into your new or existing Vanguard Individual 401(k) Plan account. You must transfer your entire plan. If you have more than one participant account within the plan, you must complete a separate form for each account."

 

[Bird]

Ah, I don't mind correcting myself.  RBG is correct, there is indeed a problem with "terminating" the first plan - google "401k terminate successor plan" and you'll see.  (My somewhat lame excuse is that I was distracted by the tail-wagging-the-dog issue of investments driving all of these decisions and trying to make this as easy as possible for you.  My clients would have had a plan that could accommodate any investments and none of this would be an issue.) So, in a more perfect world, you would have restated the plan on a Fidelity prototype and then transferred the assets because you just wanted a new investment vehicle.  But it's too late for that, so I think the only option is to "merge" the plans. 

[Mike Preston]

In case anybody is interested in the regulation section which forbids distribution from a terminated plan in this circumstance look to 1.401(k)-1(d)(4).

But BIrd is much more right than not.  The OP indeed needs a distributable event in order to rollover the funds.  The above regulation section merely says that the termination of a plan doesn't constitute a distributable event if there is another plan of the employer.

Thankfully, this thread is all about EITHER merging one plan into another (which automagically terminates the first plan, so it accomplishes what is desired) OR a two-step transaction where the first step is to transfer the assets from one plan to another followed by the formal termination of the first plan (which also accomplishes the goal).

In the case of 1-person plans the IRS is quite lax as to what constitutes formal employer action.

Somethiing as simple as a 1 paragraph document that says something to the effect of "I, acting on behalf of the Plan Sponsor of the ABC 401(k) Plan, hereby merge said plan into the DEF 401(k) Plan as of (specific date)."  Many variations on that statement would also suffice. I'm sure the financial institutions have all the necessary documentation to do it properly. Unfortunately, they also have documentation to do it improperly.  The important thing is to understand that the documentation regarding moving the funds should be an employer action and not a participant decision.

Where it might get a little sticky is that even if the plans are merged or the assets are transferred the participant likely retains the right to select investments WITHIN the surviving plan.  Any such investment discretion remains the purview of the participant and does not in any way cause a problem.

The key is to ensure that the appropriate hat is being worn at each step.

[Mike Preston]

10 hours ago, SJones said:

This is the form that Fidelity wants me to use. Do you have any concerns here?

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/transfer-assets-to-fidelity.pdf

 

Under sections 1 and 2, was told to select 'Other' and enter 'Individual 401k account' as Account Type.

 

 

Vanguard seems to be having a better Transfer Form if I was going from Fidelity to Vanguard - https://personal.vanguard.com/us/litfulfillment/ELFMainResults?cat=MAFM&subCat1=BYSL&subCat2=BMOR

 

Don't know why Fidelity does not have a form that is as explicit as the one that Vanguard has. Would be helpful isn't it? 

Thanks

You have it correct.  The first form is completely inapplicable to your circumstance because it merely authorizes an intra-plan transfer (the owner of both accounts must be identical and in your case Plan 1 "owns" the first account and Plan 2 "owns" the second account.  The second form seems to fit the bill but it can only be used if you were going the other direction.

As Bird has alluded to, you are kind of gaming the system. Most of the folks posting in this thread make their living guiding clients through the retirement plan rules morass.  When a well-meaning plan sponsor, such as yourself, tries to understand everything (which, I must admit, you are doing an admirable job), you end up whittling down the help you need to such a degree that it is no longer cost-effective for anybody to even take you on as a client.  Specifically, our liability for helping you becomes disproportionate to the potential revenue.  

I'll tell you something everybody on this bulletin board knows.  If you were to ask your accountant to refer you to someone in our field, most of us would end up helping you, even if the immediate liability/revenue *IS* out of whack.  We very much like to strut our stuff to those who can refer us business in the long run; and helping out one of their clients is always a good thing to do.

Good luck.

[SJones]

@Mike - Thanks for your assistance. Goal is to simplify my plan stuff and hopefully in a year or so, have employees at which point I'll need a TPA to set up the new plan. I know exactly who to reach out to. :-).

[card]

ok, I'll reveal my ignorance here (won't be the first or last time), but in my own defense it's been quite a few years since I've dealt with plan document issues... wouldn't it have been easier/simpler just to amend and restate into Fidelity's plan, and have Fidelity request an asset transfer from Vanguard as successor trustee?

[Mike Preston]

Of course, but read the first message where it was disclosed that the good folks at the second investment house suggested opening a new plan. The OP is just lucky to have expanded his intake beyond those who work for investment firms before doing anything contrary to the rules.  I currently have, I think, three cases in review by the IRS for those who blindly followed the advice of those on the front lines at an investment firm.  It has cost those plan sponsors thousands of dollars in fees and IRS filing fees which all could have been avoided easily. Shame.

[SJones]

45 minutes ago, Mike Preston said:

Of course, but read the first message where it was disclosed that the good folks at the second investment house suggested opening a new plan. The OP is just lucky to have expanded his intake beyond those who work for investment firms before doing anything contrary to the rules.  I currently have, I think, three cases in review by the IRS for those who blindly followed the advice of those on the front lines at an investment firm.  It has cost those plan sponsors thousands of dollars in fees and IRS filing fees which all could have been avoided easily. Shame.

@Mike - It took quite some reading and research to come up with Transfer and then Terminate instead of Rollovers etc. specially considering that I do not do this on a daily basis.

So, ended up using same Form from Fidelity twice - one for Plan and one for Plan Assets and Vanguard is happy with that.

Vanguard does not need any paperwork for Termination. They have a list of steps to go through and I basically keep the paperwork with myself.

[Mike Preston]

I don't completely understand how Fidelity uses their form, but it sounds like it has the potential of satisfying the IRS and that is about all you can ask at this point. Just remember that you have to file a final 5500-EZ for the Vanguard 001 plan showing that it is the final return.

[SJones]

Thanks Mike. Yes Fidelity has everything in one form whereas Vanguard has different forms for their inward Transfers. And Vanguard has no problems with Fidelity's form and would be able to do an In-Kind Transfer and yes as you noted, I'll be noting final return on 001 plan.

[TPApril]

On 11/16/2017 at 2:25 PM, Mike Preston said:

Of course, but read the first message where it was disclosed that the good folks at the second investment house suggested opening a new plan. The OP is just lucky to have expanded his intake beyond those who work for investment firms before doing anything contrary to the rules.  I currently have, I think, three cases in review by the IRS for those who blindly followed the advice of those on the front lines at an investment firm.  It has cost those plan sponsors thousands of dollars in fees and IRS filing fees which all could have been avoided easily. Shame.

Mike - I am curious if those 3 cases you refer to in this thread from last year are one-person plans like the plan in question in this thread, and what the errors were in general?

I've been presented the case of a one-person plan who was advised to open a solo 401(k) plan but alas she has employees she thought didn't count because they are employed for payroll & benefits through a peo. On first approach there are numerous correction issues to be resolved.

[Mike Preston]

Good luck with yours. Mine are still ongoing.