5500 first timer - question 8a

[cme685]

for a "one-participant" (2 sibling partners in gen. partnership w/ 2 self-employed 401ks under partnership EIN) for question 8a on 5500-sf, is employee contribution of up to $18500 per person (in 2018) to 401k go to 8a(2) participants and the 20-25% go to employee amount go to 8a(1) employers....or does IRS want "one-participant" plans to lump all 401k (employer & employee) contributions to 8a(2) participants because it is not a "single employer plan"

tia

[Mike Preston]

The former.  Are you filing electronically?  How are you answering Part 1 - A? Would you rather file by hand?  Do you have more than $250k in the plans as of 12/31/2018?

[cme685]

well i answered 1A as "a one-participant plan"  it's a 3 family member general partnership but only two have self-employed 401(k) accounts ... the plans were opened separately at the same broker (less a year apart but 2 diff calendar years), they fall under same EIN and I will receive both separate and a combined form 5500 AVS-Annual Valuation Statements  (i did for 2017), so I THOUGHT I could file them together from the instructions and therefore as there is slightly more than 250k combined as of year-end 2018 (individually each is less than 250k threshold), im now required to file and i guess i'll do so electronically with efast2

but it seems i was wrong

now i checked my records for the account opening pdfs en these 401(k) accounts and discovered I did a plan 001 starting jan 1 2015 for one partner and a plan 002 starting jan 1 2016 for the other partner

both had the same legal name, is that okay? .... just ID different? and administrator different (each partner administrator of own account)

so now i need to file two separate one-participant sf-5500s for 2018 - right?

additionally according to you,  im going to put 18500 for 8a(2)participants and the rest of 2018 contributions (20ish %) as 8a(1) employers   ... and you separate employer and participant contributions (even though you didnt select "a single-employer plan")

and there is nothing i file with the IRS that shows the $250k+, aka the combination of plans 001 and plan 002?

[Mike Preston]

Right on all counts, if I'm reading it correctly.  Good job!

[Bird]

Wait a sec, do you have two different plans or two different accounts?  You can have one plan with two accounts.  When you opened the "accounts" were they multiple-page forms with a lot of text (plan related - that would indicate that you created two plans) or just investment Qs (that might indicate two accounts)?  

I'm inclined to guess that you have two plans.  Probably not the best way to set this up, at least in my book, and with the same name...I guess that is not prohibited but definitely ugly.  And if you have employER contributions, I'd bet anything and everything that every eligible participant should be getting the same contribution, so how do account for the fact that one of the siblings has no account at all, and only one had contributions in one year?  

Mike is right that the reporting sounds about right, but I suspect the operation is a disaster.

And the word "broker" is in there...almost a guarantee that things are set up wrong.

 

[Mike Preston]

3 hours ago, Bird said:

Mike is right that the reporting sounds about right, but I suspect the operation is a disaster.

 

Ed, you may be right, and I probably should have inquired about the operation of the plan.  But the inquiry was regarding the reporting and that looks to be correct. Now, if plan 001 doesn't have eligibility provisions limiting participation to one partner or, in the alternative if it doesn't have a provision allowing for a different allocation percentage (zero being a viable alternative) for each participant, you are right it could be very problematic.

[Bird]

1 hour ago, Mike Preston said:

But the inquiry was regarding the reporting and that looks to be correct.

Understood.  I was surprised by your generous and kind response ? and realized that you were in fact, answering the question asked.

1 hour ago, Mike Preston said:

Now, if plan 001 doesn't have eligibility provisions limiting participation to one partner or, in the alternative if it doesn't have a provision allowing for a different allocation percentage (zero being a viable alternative) for each participant, you are right it could be very problematic.

And given that this appears to be an off-the-shelf, do-it-yourself document ("Solo-k" if you will) I'd be shocked, shocked! if it/they had the provisions needed and that this is anything other than problematic.

cme685, if it's not clear, partners in a partnership can't just each adopt their "own" plan.  (OK technically they can but it requires very careful completion of a somewhat custom document.)  The employer/sponsor is the partnership, not the individual partner, and when the plan was adopted, it almost certainly included all of the partners (please tell me you have no employees...).  That's actually not so bad if the only contributions are 401(k) - in theory at least, only one of you made a formal election to contribute in the first year and the others said "no" which isn't really a problem.  But when there are employer contributions, they must be shared by all participants, so the other partners should almost certainly have had employer contributions for any years in which they were made.  

[jashendorf]

My guess here is that this situation is FUBAAR. (that's "almost all repair")

First, as Bird already said, hopefully the partnership has no employees, other than the 2 (3?) partners. If it does, just give up now.

Second, for some reason that I can't fathom -- and I've been doing this a long time -- you were told to have the partnership set up two separate plans. That's the best possible interpretation of your OP. (Your reference to "plan 001" and "plan 002" is only possible -- and only makes sense -- in the case of two separate plans.) Maybe the broker wanted to charge duplicate fees so he "sold" you two plans; I don't know. But there certainly is no advantage to you. The alternative is that you were told to set up one plan horribly incorrectly.

Third, unless you guys are in your 50's, you were sold a bill of goods with the "solo 401(k)." It does absolutely nothing for you, except create extra expenses (assuming that someone is going to charge you for unnecessary testing, reports, etc.). If you had employees, it could be a different story, but if you had employees, what you tried to do wouldn't work anyway for a number of reasons. As is, it gives you no additional contributions, no additional benefits of any kind. In fact, in many respects, you're worse off to the extent that you have money subject to 401(k) -- which would be approximately 1/3 of your account.

Finally, what you should have been told to do -- and if there is any way to do so, you should amend your plans to do this -- is get rid of the 401(k) features, and make them discretionary profit-sharing plans. Each of you can still get up to the maximum $56K (or whatever the limit goes to), or nothing at all, or anything in between. The amounts are decided by the partnership. (If you both will want the same things under your plans, you should also merge the plans into one -- it's a lot easier, so long as you don't have to play with different contribution amounts for the two of you.)

Just one person's opinion . . .

 

[RatherBeGolfing]

15 hours ago, jashendorf said:

Third, unless you guys are in your 50's, you were sold a bill of goods with the "solo 401(k)." It does absolutely nothing for you, except create extra expenses (assuming that someone is going to charge you for unnecessary testing, reports, etc.). If you had employees, it could be a different story, but if you had employees, what you tried to do wouldn't work anyway for a number of reasons. As is, it gives you no additional contributions, no additional benefits of any kind. In fact, in many respects, you're worse off to the extent that you have money subject to 401(k) -- which would be approximately 1/3 of your account.

Finally, what you should have been told to do -- and if there is any way to do so, you should amend your plans to do this -- is get rid of the 401(k) features, and make them discretionary profit-sharing plans. Each of you can still get up to the maximum $56K (or whatever the limit goes to), or nothing at all, or anything in between. The amounts are decided by the partnership. (If you both will want the same things under your plans, you should also merge the plans into one -- it's a lot easier, so long as you don't have to play with different contribution amounts for the two of you.)

Just one person's opinion . . .

You are assuming that there is enough comp to max out using just profit sharing, that is often not the case.  For many of these small companies, you don't have enough comp to get to $56K as a profit sharing contribution, but you can get to $38K and max out at $56K with the $18K deferral.

[Bird]

15 hours ago, jashendorf said:

Just one person's opinion . . .

I agree with the first part of your message but a 401(k) can indeed allow for higher contributions in many situations.  Keeping it simple, assume a corporation with one shareholder/employee with $80,000 of W-2 income.  Profit sharing contributions (or SEP*) would be 25% max or $20,000.  The 401(k) could be layered on for an additional $19,000/$25,000.  It's only when compensation exceeds 25% of the 415 limit ($224K in 2019) that the 401(k) adds nothing, except if over age 50.

*What is really inefficient is using a PS plan instead of a SEP.  A SEP gets you to the same place with no reporting...unless you are talking about different contribution rates for different participants, then you do need a plan.

(I see RBG just beat me to it with a more efficiently worded post.)

[cme685]

i meant to say (major) online brokerage not broker (no one in this decade should be using a human broker) ...fee-free self-employed 401(k) plans... 3 partners, only 2 have retirement plans cause the other uses retirement from w-2 job ... 

it's 2 different plans cause they were opened (less than 12) months apart but at the same brokerage.....cause one partner wanted to open plan and contribute in December and was allowed an early start.

and each plan only mentions the partner it is designed for in the paperwork (only share EIN)

and to the poster "bird", no the employer contributions do vary --- they are not identical ... i see no rule anywhere they must be identical ... 

everything to some degree evens out in the uneven ownership % of the partnership for capital gains/interest that flow through as well as the differing $ amts in guaranteed payments to partners. (in this case, the partner who doesnt get the partnership retirements contributions is the majority % owner but also receives zero guaranteed payments to partners)

now that I've explained further, i'm not sure if anything is still problematic about this setup cause it's just a family gen partnership with a unique partner-split not a partnership of business associates or larger... again, my previous post (after some understanding about the forms) was just to verify that when I fill out the sf-5500 as a one-participant, I put a value both in the employers (up to 36.5k) and the participants (up to 18.5k) box and I'm filling it out for plans 001 and 002 individually not collectively.

[Bird]

OK you've confirmed my suspicions; this is totally screwed up.  You doing this directly is the only thing possibly worse than using a human broker.  You are under the delusion that you have three separate businesses and are "only" sharing an EIN; you have one business and it's the business, not the individual partners, that can set up a retirement plan, and that plan is subject to certain rules, one of which I guarantee is that all employees (including partners) have the same eligibility rules and also get the same % employer contributions.  (It's possible to set up a plan where you can vary eligibility and/or employer contributions, but if it is free from an online brokerage firm it doesn't.)

You are also under the delusion that because everything evens out it is ok.  It's not.  

Other than the document and operational problems described, it also sounds like you have what is referred to as a "disguised CODA" (disguised cash or deferred arrangement).  I think you are aware that 401(k) (i.e. cash or deferred) contributions are limited to $18,500/$24,500 in 2018...but if the partners are varying their contributions to an extent greater than that by using employer contributions, then you are using this as a cash or deferred arrangement but exceeding the limits.  Not sure if that is your biggest problem but the way you've described it that's what is going on, and contributions in excess of the 401(k) limits would be disallowed.

[Mike Preston]

Ed,

I'm not convinced anything is wrong.  Of course, without seeing the documents I'm not sure everything is correct. It is not impossible that the partnership has adopted separate plans which allow for naming eligible participants and that each plan has named a single participant.  And without seeing the actual allocation amounts and looking at each partner's earned income I don't think it is necessarily over the line as far as a deemed CODA goes.

The OP came here looking for confirmation that the 5500-SF's were being filled out properly.  They were.

*I* know you are just trying to save the OP from big trouble down the road, but based on the fact I would have bet dollars to donuts the OP wouldn't have been able to get the reporting right, and would have lost my bet, I'm willing to believe until proved otherwise that the allocations are correct.

Perhaps we can boil the question down to its essential elements so that a call can be placed to the source of his plan documentation to once and for all determine whether there is a problem.

 

 

[Bird]

Mike, do you really think there is any chance at all that a free document from an on-line vendor would allow for excluding or otherwise limiting participation?  And that the OP would complete it correctly?  I agree that the reporting could be correct and even that the operation could be correct but I'd put the odds close to 0.

[Mike Preston]

I am ever the optimist!