husband and wife - solo k plan

[cpc0506]

Hello,  Client A, a sole proprietor, has his own 401k plan.  His wife just established her own sole proprietorship.  Client A wants to add his wife's company as a Participating Employer to his plan.  Would this be considered a Control Group with an adopting employer or a MEP with an adopting employer?

[Bri]

I suppose they'd need to check off all the usual "not a controlled group" boxes -

1 - the usual noninvolvement rule between the businesses

2 - no minor children

3 - not a community property state

Obviously the first one there is one they can control most easily if there's a specific desired outcome to the CG determination.

[CuseFan]

Which even if 1, 2 and/or 3 apply and it is a CG, I believe pension legislation under consideration could change that in the future (probably only for 2 and 3 is my guess). So this could go from CG to not CG w/o anything (other than law) changing, just be aware.

Also, if using a vendor's branded "solo k" product, make sure it allows for other participating employers.

[cpc0506]

I have now learned that Client A is an LLC and his wife's company is an LLC.  Still waiting for word, but I am guessing both are LLC taxed as sole-props.

 

Does this change any of your responses?

[Bri]

I'd say no change.

[Doc Ument]

It might be that the commentators thus far know more about the marketplace than I do. As a technician, however, I have some observations that might potentially be useful, or perhaps they are entirely out of date. I second the motion that CuseFan has made about inquiring about "other participating employers."  Allow me to provide more detail that I suspect is behind that suggestion.

 

More than once, I have seen people mistake a contemporary "solo" plan with what used to be called a "Keogh" plan. There's a reason why document vendors have stopped referring to plan being "owner-employee" plans or "Keogh" plans, and that is because there is no longer a legal need or any legally motivated desire for having separate plans for only a certain type of business or a certain type of "employee." However, from my limited perspective, that's not to say that some vendors haven't chosen to continue using ancient (pre-EGTRRA) legal divisions for "Keogh" plans and given the product, thus designed, a new name of "solo." You could have two very different documents calling themselves "solo" plans.

 

Until you know the nature of the vendor's solo document, i.e., the philosophy that underlies its construction, you cannot be certain whether it makes any difference whether it is a single employer plan or a MEP. Some solo plans might preclude a MEP, other solo plans might preclude additional employers even if related, and some solo plans might allow for all of those possibilities. Some solo plans might preclude having any common law employees, and some solo plans might not. That is because there does not appear to me to be any "solo" qualification rules except for the rules that the document vendor has designed into their product, and if they have done so, then you are required to abide by the document even if the document has restrictions that are quite unnecessary. It is quite possible that a vendor has continued to have restrictions that are no longer necessary. Perhaps it was deliberate.

 

To summarize thus far, "solo" is not a term that has a definite meaning to me unless everyone is convinced that every document vendor attaches the same meaning to the word "solo."
 

For example, the <only> difference I see in the particular solo product that I use is that the solo AA is a subset of the "regular" AA's options. There's been no deletion of any provisions regarding common law employees nor any restriction on the nature of additional participating employers. There is no difference in language between the "solo" BPD and the "non-solo" BPD. That means that nothing bad happens (under this "solo" plan) if the employer ends up hiring a common law employee or having a related or unrelated employer adopt the plan as an additional participating employer, other than the indirect costs associated with having a plan document with pre-selected AA options that cost more money (in operation) than having a more efficient plan design that is built using the "regular" AA. For example, maybe the solo plan provides only full and immediate vesting, whereas the regular AA has options for deferred vesting. Or perhaps the solo product lacks annuity options whereas the regular AA does.

 

I made up those two examples, as I don't have the documents in front of me. I merely am illustrating that I know that the primary reason for my vendor's separate "solo" product is so that advisors can offer simpler looking documents to certain employers (or their advisors), i.e., those who don't need or don't want a zillion AA options, and consequently the advisor knows that the record keeper can make presumptions about every "solo" plan's provisions (i.e., presumptions that cannot be made about the "regular" plan's provisions from that same vendor). The advisor can then design uniform administrative procedures for all its solo plans and give such projects to staff having less expertise than the staff who administer more sophisticated plans. Perhaps an advisor limits their practice to employers that fit on a particular vendor's solo product.

 

However, it is possible that you have a plan that is designed from the ground up to be limited to only a specific type of employer, or that prohibits having any common law employees from becoming participants. That is why I recommend that you determine exactly what "solo" means to your document vendor. (You might be able to get all the answers by examining the document's language.) As you suggest, it is conceivable that the plan is designed to accommodate only single-employer plans. If the plan does not permit a MEP, then don't forget to also consider the possibility of an affiliated service group of any type of businesses, regardless of their format or their manner of taxation. For example, even if Mom only makes and bakes the pizza using her corporation (or "company") taxed as a proprietorship and Dad delivers the pizza using his corporation (or "company") taxed as a proprietorship, then although they might not be a controlled group (due to the spousal rules), they might be an affiliated service group, especially if all of Mom's pizza gets delivered by Dad, and Dad distributes only Mom's pizzas.

 

To summarize, maybe it does matter and maybe it doesn't matter what type of company is adopting the plan or how each entity is taxed. (It may or may not matter if there are common law employees.) Unless we agree that all document vendors mean the same thing by the word "solo," then such matters depend upon that particular document vendor's definition of "solo." 

[Doc Ument]

There appears to be a comment flag on my earlier post suggesting that what I wrote was confusing. Perhaps that is because I was trying to say that solo plans are, by definition, confusing because the word "solo" does not appear to have a uniform definition across the industry.

 

From my view, the word "solo" implies only that the plan was optimized (whatever that means) in some way for small businesses (whatever that means). Such optimization is not required by law but is discretionary for the vendor. For example, one vendor has a DC plan available for every employer, and also has an alternative DC plan available for any company that wishes to use the alternate DC plan, and the latter product is something that vendor calls a "solo" plan. The only reason that vendor is offering such a plan is because there is a market that generally coincides with the employers that historically would have used a Keogh plan. Rather than forcing such employers use the equivalent of a Keogh plan, they might have a plan that is much more flexible that a Keogh plan. Each vendor will take its own course, which is why I cannot answer questions about solo plans (as if all solo plans are the same) unless I can examine the document (since not all solo plans are the same). The word "solo" in and by itself offers no clue as to the nature or the extent of how a plan product has been optimized for the targeted market, but tells me only that such optimization has occurred. It therefore would not surprise me if I saw a solo product that didn't cover common law employees or that prohibited MEPs, but I would not make such assumptions.

 

For example, I believe that you will not find any reference to solo plans in any regulation or IRS Revenue Procedure (not even the Revenue Procedure for Cycle 3 and which governed the approval of Cycle 3 solo plan products). I am relying on Window's file search function in making this statement (I have a folder that contains 90% of the guidance issued on retirement plans over the past decade).  In contrast, when I do a general search for "solo plan" on the internet, I find many listings on the first page, each presenting a different definition, such as "an account for the self-employed," or "a single-participant plan," etc. My favorite one states: "A solo 401(k) is a traditional 401(k) plan, except that it covers only one employee -- the sole proprietor of a business -- and, at most, a spouse."

 

Notwithstanding such definitions, the solo plan with which I am the most familiar covers every employee other than certain statutorily excluded employees (e.g., nonresident aliens with no US income), with no option to exclude any more. If I used only the internet for my answers, then the solo plan I am using shouldn't be called a solo plan. The IRS didn't mind, though, because they (apparently) don't have a definition of solo when reviewing solo plans.

 

Consequently, when I see an inquiry that poses an inquiry regarding solo plans as if all solo plans are alike, I am usually quick to indicate to that person that I am unable to generalize anything about the nature of the solo plan without knowing a great deal more about THAT particular solo plan. For example, knowing that the plan is a solo plan does not inform me of the nature or scope of that vendor's optimization for the targeted market. The fact that it is a solo plan does not tell me what consequences will arise if another employer adopts the plan or if any adopting employer hires an employee. Even if that vendor's software does not automate any additional employer participation agreements, it is conceivable that the BPD not only allows additional adopting employers, but also allows MEPs. That means I must scour each specific "solo" document to answer questions about the nature and degree of its being "solo," such as its restrictions on additional participating employers and on which employees may be or must be covered (or cannot be covered).

[Bird]

1 hour ago, Doc Ument said:

There appears to be a comment flag on my earlier post suggesting that what I wrote was confusing.

"Confusing" in the sense that you would expect anyone to read 925 words on this subject.

[Nate S]

The confused was me, like Bird said, I lost your train of thought before it left the station.  I'm also the sad face on your reply because you felt the need to follow-up to your first muffed punt.  "Solo"'s don't exist, they're just a marketing term so financial advisors don't get confused and try to restart Keoghs