Solo 401k established, but not funded

[Spencer]

I have a prospective client who established a Solo 401k for him and his wife last year.  He did not fund it.  Turns out he has a part-time employee who was eligible.  There is no hours or service requirement.  Document preparer said that is their default when completing documents.  He doesn't mind paying a safe match contribution to the employee, but the issue is that she was not offered the opportunity to defer.  But how do we correct for the missed deferral opportunity when nobody deferred?  

is it possible to correct the original plan document to align with the client's intention?   Retroactive amendment? 

Can we just pretend the plan never happened since it was funded or filed with the IRS?  (just kidding)

[Belgarath]

See RP 2019-19, Appendix A.05(2)(d)(i).

[BG5150]

After the correction, they can amend the plan to have 1 YOS and the employee would be out (unless they work(ed) 1,000 hours in a year along the way).

 

Participation is not a protected benefit.

[Jakyasar]

BG5150, once employee is in, how do you avoid 410b, 401a4, SH, top heavy? This is a non-key/NHCE. What am I missing here? Just curious.

[RatherBeGolfing]

43 minutes ago, Jakyasar said:

BG5150, once employee is in, how do you avoid 410b, 401a4, SH, top heavy? This is a non-key/NHCE. What am I missing here? Just curious.

The employee became a participant because there was no service requirement.  If the plan is amended to require 1,000 hours, and the employee has never had 1,000 hours, the employee is no longer able to actively participate unless there is an exception to grandfather current participants.  Like BG said, participation is not a protected benefit.

 

[Jakyasar]

Not for safe harbor and not for safe harbor, right? I guess I am seeing the logic here. Once you are in and NHCE, hours do not matter for top heavy and safe harbor. May be I will get it later.

[RatherBeGolfing]

12 minutes ago, Jakyasar said:

Once you are in and NHCE, hours do not matter for top heavy and safe harbor. May be I will get it later.

We are talking about eligibility requirements, not allocation requirements.  If I have no eligibility requirements with immediate entry, and I amend to require age 21 + 1 YOS, anyone who has not attained age 21 or had 1 YOS has not met the eligibility requirements.  Whether you are still eligible depends on the current requirements, not what the requirements were when you first entered the plan (unless the amendment or document itself makes an exception for current participants).

[Lou S.]

2 hours ago, Jakyasar said:

BG5150, once employee is in, how do you avoid 410b, 401a4, SH, top heavy? This is a non-key/NHCE. What am I missing here? Just curious.

He'll still be a current employee and you'll still be a title 1 plan (Bonding/No EZ filing/ SAR / notices all that good stuff) until he has a distributable event and takes his money out assuming he has an account balance, but he will be a former participant who no longer meets the eligibility conditions of the plan and will not be looked at for all the issues you are worried about. At least for future years. Since he was a participant for at least some of 2021 you'll probably need to satisfy all those issue you reference. But after that you should be fine.

Well until comes back in under the long term part clause of Secure. But you can burn that bridge when you get there.

 

[Jakyasar]

Sorry being a bit thick headed here as I am trying grasp this concept (in theory, as I never had to deal with this scenario in the past).

So, employee (the only non-highly compensated employee) is over age 21 but never worked (and will work) 1000+ hours at any given 12 month period.

New plan with no initial eligibility, employee becomes a participant, at least this is what I understood from initial post.

Now you are saying let's change the plan's eligibility to 21/1 during 2021 and therefore the employee is out as a participant for 2022 - all this is retroactive to his initial eligibility. This is what I am not grasping, interesting. I am definitely missing something in the law here.

As Lou S. said, still a participant for 2021, this is clear.

Time for a vacation and may be then, I will understand.

Thank you for trying though.

[BG5150]

It is NOT retroactive.  Only prospective.  They need to correct the error for '20 and thus far into '21.  Then then can amend the plan to have 21/1 eligibility requirements and as long as the employee did not satisfy both conditions yet, he/she is out of the plan until they do.

I don't think anyone said it would be retroactive...

[Lou S.]

Assume plan is adopted effective 1/1/2020 with immediate eligibility.

Assume part time employee (PT-a) hired prior to 1/1/2020 but never works 1000+ hours in any year and assume he does not terminate in 2021.

Assume plan is amended prospectively (today) on 5/12/2021 to change the eligibility from immediate eligibility to 21/1 dual entry.

Assume that eligible employees under the prior rule are not grandfathered eligibility under the old rule by the document or amendment.

PT-a is an eligible participant from 1/1/2020 - later of effective date of the amendment change or sign date of the amendment. He has entered the plan and is a participant for 2020 and at least part of 2021 from 1/1/2021 - later of effective date or sign date of the amendment changing the eligibility.

Now you check his eligibility under the new rule of 21/1 dual entry and find he no longer meet sthe Plan's new eligibility condition and is no longer an active participant in the Plan. He is no longer eligible to defer under the terms of the Plan.

For 2022 if he still doesn't meet the new eligibility terms you ignore him for all testing as he not a participant at any point in 2022.

For 2021 it's complicated as he was an active  participant from 1/1/21 - he was no longer a participant in 2021. So he's going to go into your ADP/ACP test (unless you are safe harbor), he's going to go 401(a)(4) test, he's going into you 410(b) test and he'd be due a TH minimum if the plan was top heavy or didn't meet the "deemed" not T-H rule. But in this case the only one with a balance is PT-a under your EPCRS correction so you're not TH for 2021 so that's not a concern. At least that's my understanding. I've never thrown eligible employees out the client has always wanted to grandfather them in when they make eligibility more restrictive prospectively. But you don't have to grandfather them in.

Hope that helps.

[Jakyasar]

Thank you both for your patience and explanation. You learn something new everyday.

[Bri]

And on a final bright side, the plan could disaggregate its 410(b) and 401(a)(4) testing for 2020/2021.  The statutory group is only HCEs.  The otherwise excludable group is only the NHCE.

[Jakyasar]

Very good and sunny bright side, always love the OEX testing, can create miracles

[BG5150]

Can you OEX someone out of Safe Harbor?

[Jakyasar]

OEX - otherwise excludible - is that what you meant with your question?

[BG5150]

I meant, can you have someone eligible for the plan, but not get safe harbor b/c they are otherwise excludable.

[Bri]

You could if the document said so, but you'd probably owe a top heavy minimum to them anyway.  But could escape gateway extra.

[Lou S.]

16 minutes ago, Bri said:

You could if the document said so, but you'd probably owe a top heavy minimum to them anyway.  But could escape gateway extra.

Except the owner had no balance on 12/31/2020 so the plan isn't TH for 2021. But normally yeah you'd be right about the TH minimum.

[Spencer]

Thank you all so much for the replies and for pointing out that participation is not a protected a benefit. 

[DH]

I am with Jakyasar, I did not realize you could boot someone out of a 401k plan if the new eligibility criteria was never met by that employee. 

What if the plan required the 21/1 from the start and the employee met the criteria and joined the plan.  Later the the employee switches to part-time (less than 1000 hours a year).  Then the employee is still eligible for deferrals and the safe harbor contributions, correct.  The employee just wouldn't be eligible for the contributions with allocation conditions?

[BG5150]

That is correct.