Solo K with statutory Eees

[pjb1835]

Discovered Solo K excluding nonowners had statutory employees during 2018.   We are now past October 15th 11(g) amendment deadline.   Does latest EPCRS Rev Proc regarding self correcting retroactive discretionary amendments help us without having to go through VCP?

[Larry Starr]

Do you really mean "statutory employees" which are a very specific category (like, life insurance agents or bread route salesmen)? And I am at a loss to understand what you mean by "solo K" that excludes non-owners; WHAT?

Be a little (no, A LOT) more specific about what is going on here and we might be able to give a better answer.

 

[pjb1835]

Sorry.  Solo k doc is a pre-approved doc where plan only covers owners or partners.  Employer has employees, 2 of whom met age 21, 1 year of service, 6 months in 2018.   Looking for a way around vcp.

[Bird]

12 hours ago, pjb1835 said:

Solo k doc is a pre-approved doc where plan only covers owners or partners.

You mean the plan language says that (which would surprise me), or everyone just ignored the other employees?

[RatherBeGolfing]

14 minutes ago, Bird said:

You mean the plan language says that (which would surprise me), or everyone just ignored the other employees?

I have seen plenty of those docs.  The way they are written they cannot be used when there are other employees.  They are usually of the "here is a short adoption agreement, fill it out and keep it with your files" variety.  

[pjb1835]

Well owner just didn't realize when he hired employees it affected his plans compliance.

[Bird]

3 hours ago, RatherBeGolfing said:

I have seen plenty of those docs.  The way they are written they cannot be used when there are other employees.  They are usually of the "here is a short adoption agreement, fill it out and keep it with your files" variety.  

The ones I've seen - and I can't say it is that many - have said no exclusions.  They are designed to be used when there are no other employees, but are still valid plans when there are in fact other employees.  (Hence our frustration with the term "Solo" 401(k), as if it is in fact a different type of plan.)  The correction will depend on whether employees were excluded in the document or "just" not included in allocations.

[Bird]

2 hours ago, pjb1835 said:

Well owner just didn't realize when he hired employees it affected his plans compliance.

See above.  I'd argue that the existence of employees did not affect the plan's compliance - the plan is fine - but the operation of the plan, in particular the allocations, did not agree with how the plan was set up.  The solution may be to "just" allocate the contribution differently by including the employees.  If it can be seen as a pooled account then that's not problematic in the least; just re-do the allocations to include all eligible employees. (Not problematic in a compliance sense; likely problematic in that the owner doesn't want them to get anything.  Different issues.)  Now, there is likely a problem with not giving the employees a deferral opportunity, but there is a self-correction fix for that.

[Larry Starr]

21 hours ago, pjb1835 said:

Discovered Solo K excluding nonowners had statutory employees during 2018.   We are now past October 15th 11(g) amendment deadline.   Does latest EPCRS Rev Proc regarding self correcting retroactive discretionary amendments help us without having to go through VCP?

With the additional info, you now have your answer.  You plan DID include them, you (client) just didn't administer the plan correctly.  Reallocation of the existing contribution for 2018 is probably the easiest thing you can do. What is your role in this? Did you set up the plan?  Do the documents?  Administer it?

[RatherBeGolfing]

1 hour ago, Bird said:

The ones I've seen - and I can't say it is that many - have said no exclusions.  They are designed to be used when there are no other employees, but are still valid plans when there are in fact other employees.  (Hence our frustration with the term "Solo" 401(k), as if it is in fact a different type of plan.)  The correction will depend on whether employees were excluded in the document or "just" not included in allocations.

I haven't looked at any recently, might even be as far back as before the last restatement.  Several of those documents were specifically written to exclude non-owners (with no option to include).  These were your all-in-one fund company plans where everything has to go through that company.  They don't have (or didn't have) staff for testing and 5500s (other than EZ) and all that fun stuff we do.  

[Larry Starr]

2 hours ago, RatherBeGolfing said:

I haven't looked at any recently, might even be as far back as before the last restatement.  Several of those documents were specifically written to exclude non-owners (with no option to include).  These were your all-in-one fund company plans where everything has to go through that company.  They don't have (or didn't have) staff for testing and 5500s (other than EZ) and all that fun stuff we do.  

Interesting; I've looked at many of these documents (since I am famous for "there's no such thing as a solo 401(k)") and can't recall ever seeing one that didn't work (that is, never saw one that excludes anyone who would otherwise qualify).  Certainly possible, and clearly stupid, but exactly what you would expect from fund companies who are ok with "brain surgery, self taught".

[Bird]

18 hours ago, RatherBeGolfing said:

I haven't looked at any recently, might even be as far back as before the last restatement.  Several of those documents were specifically written to exclude non-owners (with no option to include).  These were your all-in-one fund company plans where everything has to go through that company.  They don't have (or didn't have) staff for testing and 5500s (other than EZ) and all that fun stuff we do.  

Not to drag it out...but ok, we're dragging it out...I did (just) look at Vanguard's - no entry requirements/no exclusions.  And I happened to have one from E-Trade - there were fill-in-the-blanks for age and service but no place to exclude anyone if you wanted to.  Also interesting that the package I saw didn't even have an Adoption Agreement; it looked like maybe the fill-in-the-blank SPD was supposed to double as an Adoption Agreement but it wasn't clear.  I got it second hand so it might have been dropped but it sure looked like it was supposed to be a comprehensive package.

I'd actually be surprised if the IRS would approve a plan with built-in exclusions.

[david rigby]

18 hours ago, Larry Starr said:

... but exactly what you would expect from fund companies who are ok with "brain surgery, self taught".

I did stay at a Holiday Inn Express last night.

[Luke Bailey]

pjb1835, in the unlikely event that the plan document really does exclude nonowners, I think you would not satisfy the requirements for self-correction by plan amendment. First, your failure is a demographic, not operational failure. Second, the amendment would not apply to all eligible employees. See Section 4.05(2) of Rev. Proc. 2019-19. In the more likely case that the plan document does not exclude these otherwise eligible employees, then simply apply the plan document as written, as explained in all the other posts.