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Simple 401(k) (basics)


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I understand Simple IRA plans.  Setup is an IRS form 5304 or 5305 depending on where the money is invested.  Contributions are put in an IRA in the participant's name.  I don't handle them.

So what is a Simple 401(k)?  Basically a 401(k) with only a 3% match or a 2% NEC? 

  • For setup I see on the ftWilliam system there is a toggle to designate the 401(k) as a Simple
  • A 5500 is required.  A 5500-SF?  Same filing deadline?
  • You have to pull together all the financial info to prepare the 5500, Is an annual report prepared, participant statements?

Is it really just a "vanilla" as it can get 401(k) with Simple IRA eligibility requirements, no testing, no PS contribution?  

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Really, huh.  and I see there are some likes and even a chuckle. 

I am by no means pushing this product, I was asked and so I looked into it and am inquiring.  The FA says this would be for a business with 3 partners.

I read, Simple IRAs do not allow ROTH deferrals.  True?   I'm guessing because the match or nec is pre-tax. 

For a Simple 401(k), the contributions are not deposited into IRAs but rather an investment account.  If that is the case, can a Simple 401(k) have 2 accounts for each participant, one for ROTH deferrals and one for the employer contribution?

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On 11/9/2022 at 11:27 AM, Basically said:

Really, huh.  and I see there are some likes and even a chuckle. 

I am by no means pushing this product, I was asked and so I looked into it and am inquiring.  The FA says this would be for a business with 3 partners.

I read, Simple IRAs do not allow ROTH deferrals.  True?   I'm guessing because the match or nec is pre-tax. 

For a Simple 401(k), the contributions are not deposited into IRAs but rather an investment account.  If that is the case, can a Simple 401(k) have 2 accounts for each participant, one for ROTH deferrals and one for the employer contribution?

You might be hard-pressed to find a SIMPLE 401(k) plan document. It's the little plan that could, but (appears to) never did.
The question becomes, could another type of 41(k) provide the benefits that they want?

If this is three partners (no common-law employees), why not an SBOK/SoloK/Individualk?

You are right that SIMPLE IRAs do not allow for Roth deferrals.

And, yes, like any other 401(k) a SIMPLE 401(k) would permit two accounts, one for traditional assets and another for Roth if the plan permits designated Roth contributions.

Life and Death Planning for Retirement Benefits by Natalie B. Choate
https://www.ataxplan.com/life-and-death-planning-for-retirement-benefits/

www.DeniseAppleby.com

 

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  • 2 weeks later...

DANG!  The advisor is back on the Simple 401(k) plan.  I guess a child of the owner will be an employee.    I am still going to do my best to convince them the Simple might not be the best option. Just want to get my facts straight. I appreciate everyone's help.

So if they go Simple 401(k):

  • Because it is a Simple 401(k) they will need to complete a 5500, correct?
    and because there will be an employee other than owners, a 5500-SF?  Same 5500 rules as a qualified 401(k)?
  • It will be a Simple 401(k) so no employer non-elective contributions, just the Simple match or Simple NEC, correct?
  • Because just the Simple match or Simple NEC there is no testing.  It's like a SH plan.

Appreciate it.

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2 hours ago, Basically said:

because there will be an employee other than owners, a 5500-SF?

If I understand you correctly, the only participants will be two owners and one owner's child? If it is a partnership, they would file 5500-SF. If it is an S-corp, they would file 5500-EZ.

2 hours ago, Basically said:

Because just the Simple match or Simple NEC there is no testing.  It's like a SH plan.

If my previous understanding about the participants is correct, then there would be no testing even if it were not a SIMPLE or safe harbor plan. There are no eligible non-highly compensated employees, so coverage and nondiscrimination tests are deemed to pass. A SIMPLE in this case would serve no purpose except to limit their contribution flexibility.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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19 hours ago, C. B. Zeller said:

There are no eligible non-highly compensated employees, so coverage and nondiscrimination tests are deemed to pass.

But if a child was hired (is an employee) then there would be a NHCE.  The child was thrown into the mix last Friday, not part of the original scenario.  

 

19 hours ago, C. B. Zeller said:

If I understand you correctly, the only participants will be two owners and one owner's child? If it is a partnership, they would file 5500-SF. If it is an S-corp, they would file 5500-EZ.

Oh wait, this is new to me.  What difference does the entity type make? Is it ff the entity is an S-corp and there were owners and a child, the child would be deemed to own the stock of the owners therefore making them an owner?

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On 11/14/2022 at 1:43 PM, Basically said:

I ended up convincing the FA that the SoloK would  be the best option. 

"SoloK" is a marketing term.  A SoloK plan is just a regular 401(k) plan that happens to only cover owners (and their spouses).  Sure, some institutions offer an abbreviated plan document making things a little easier, but once an employee is hired then you have to put the plan on a full-blown document, increasing time and effort on all fronts.

28 minutes ago, Basically said:

But if a child was hired (is an employee) then there would be a NHCE.

If it is a child of an owner (more than 5%), then the child is an HCE by attribution automatically.

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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25 minutes ago, Basically said:

But if a child was hired (is an employee) then there would be a NHCE.  The child was thrown into the mix last Friday, not part of the original scenario.  

Just to be clear, we are talking about a child of one of the owners, correct? Not just some random child off the street? Ownership is attributed from parents to children for HCE determination purposes. If the parent is HCE because they are a 5% owner, then the child is also a 5% owner and an HCE.

27 minutes ago, Basically said:

What difference does the entity type make? Is it ff the entity is an S-corp and there were owners and a child, the child would be deemed to own the stock of the owners therefore making them an owner?

The definition of one-participant plan, from the 5500-EZ instructions, treats a 2% shareholder in an S-corp as defined in §1372(b) as a partner, and §1372(b) includes attribution of ownership under §318. If it's an S-corp and the only participants are owners and their children, then the children are treated as owners for purposes of determining whether the plan is required to file 5500-EZ.

Note that this does not make it exempt from the other requirements of Title I, so things like SPDs and SARs are still required even though they usually wouldn't be with an EZ filer.

Free advice is worth what you paid for it. Do not rely on the information provided in this post for any purpose, including (but not limited to): tax planning, compliance with ERISA or the IRC, investing or other forms of fortune-telling, bird identification, relationship advice, or spiritual guidance.

Corey B. Zeller, MSEA, CPC, QPA, QKA
Preferred Pension Planning Corp.
corey@pppc.co

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So this comes down to ownership attribution.  And in my situation, when Mr. and Mrs. Smith (who are owners) hire Bobby Smith (son), he is also an HCE due to attribution.  That would be great news because I can press again that a 401(k) is the way to go due to there being no NHCEs (because they just want to defer, or make a nominal match like a Simple).  I can frame it to them that a NEC could be totally discretionary.  Can't get any more flexible.

For my own knowledge, ownership attribution doesn't go up, a parent of an owner who works for the business wouldn't be attributed ownership because their child was an owner of the sponsoring business.  The parent would just be an employee.

 

On 11/29/2022 at 9:16 AM, BG5150 said:

"SoloK" is a marketing term.  A SoloK plan is just a regular 401(k) plan that happens to only cover owners (and their spouses).

I knew this.  I tell Solo clients that it was just a way to sell small plans to individual consultant type businesses.

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38 minutes ago, Basically said:

For my own knowledge, ownership attribution doesn't go up, a parent of an owner who works for the business wouldn't be attributed ownership because their child was an owner of the sponsoring business.  The parent would just be an employee.

 

I recommend this: https://www.lfg.com/wcs-static/pdf/Attribution of Ownership in Retirement Plans - PDF.pdf

William C. Presson, ERPA, QPA, QKA
bill.presson@gmail.com
C 205.994.4070

 

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