Solo to General 401(k) Plan?

[TPApril]

Company has existing 'Solo 401(k)' Plan.

Contributions were made once, in year started up, > 5 yrs ago.

Now there are employees and they would like to offer them opportunity to participate.

Actually, they would like a brand new plan.

Is there an issue to terminate existing 'solo' plan and start a brand new plan, or rather do a complete restatement?

Eligibility in 'solo' is immediate but they would like 21/1.

[Bill Presson]

They already have a plan. And based on your post, the employees are likely already eligible.

[Bri]

Absolutely there's a big issue, the successor plan rule. 

Some "solo" documents preclude other employees from participating at all.  So a new document would be a definite.  But for the same plan.

[TPApril]

I had a feeling.  looks like missed deferral opportunities, though NHCE ADP was zero since no 401(k) contributions have been made since additional employees were hired....

So..we can start new plans retroactively, seems we can now amend a PS contribution retroactively, I'm wondering if this plan can be restated retroactively to 1/1/22? It was interestingly restated in Cycle 3 on time.  Either way, they intend to add in 21/1 eligibility for future employees.

Here's an uninformed (on my part) question - what makes a 'Solo' 401(k) plan a solo plan? Is that more of a trust side term?  I see that the terms of the adoption agreement are not necessarily geared towards a company with employees, but it does not seem to indicate the plan is limited to owner and spouse.

[Bri]

Usually that just means they stripped out all sorts of questions from the adoption agreement and the basic plan document that aren't ERISA-specific.  You don't need an "in-service withdrawals at 59½?" question, as the plan can default to yes and if the sponsor doesn't need one, she just doesn't take one.  So the AA ends up being a quarter the length of usual adoption agreements.

Anyway, I've seen that kind of document explicitly say something along the lines that if the employer ends up with an employee who could end up covered, then the plan sort of freezes up - no contributions allowed, and so it's imperative on the sponsor to get a "full-blown" 401(k) document.

[justanotheradmin]

37 minutes ago, TPApril said:

Here's an uninformed (on my part) question - what makes a 'Solo' 401(k) plan a solo plan? Is that more of a trust side term?  I see that the terms of the adoption agreement are not necessarily geared towards a company with employees, but it does not seem to indicate the plan is limited to owner and spouse.

Solo 401(k), Uni-K, etc are all marketing terms. Not technical terms at all. It is one of my pet peeves that people think these kinds of plans are special or exempt from something because they are called 'solo' plans. Not trying to rail against you, I know you didn't invent the term. Just expressing my distaste at some of the marketing and sales things in general. Those plans are regular 401(k) plans subject to the same rules, reporting, discrimination testing etc. 

I agree with the others, if the plan allowed for deferrals immediately you likely have a missed opportunity to defer, but it is document specific. 

[Lou S.]

And don't forget your plan is top-heavy since the owner once made a contribution I'm assuming the top heavy ratio is 100% since the employees haven't been given the opportunity to defer.

[Jakyasar]

In addition, depending on when the employees became eligible, you may have 5500 filing issues i.e. cannot file EZ even if no other eligible employee is deferring, they are participants.

Also, if they were eligible before 2022, you have possible additional coverage, top heavy issues, missed deferrals, etc etc etc.

Solo plans are marketed for 5500-EZ filers and have no flexibility for PS allocations and SH match (not that I have seen any)

Good luck

[Barry Levy]

There is no magic here. Generally, a Solo K is a 401(k) plan where the only employees that are eligible are the owner(s) and spouses (Note: This is not like stock attribution where other certain family members are considered HCEs).  The terms of the plan dictate the eligibility and entry date provisions.  Typically, the existing plan would be amended prior to other employees meeting eligibility.  We alway mentor our clients to set up the plan assuming other employees may become eligible.   We do this even when the employer states "we will never hire any employees" or " no one will ever work over 1,000 hours.  There is no downside to setting up the plan in that manner,  Experience and qualified plan wisdom prevails.  

[TPApril]

So.....the company in question is not a client of mine...and they have informed me that they plan to just terminate the plan through current provider and wait two years. They don't want to pay the cost of missed deferrals and delinquent 5500's (for starters).

[justanotheradmin]

Someone should remind them - that even actual 'one participant plans' must file a Form 5500 for the final year. so they aren't going to get out of filing 5500s entirely. Unless of course they choose to ignore that rule along with the rest of the rules...

The filing requirement is there for the final year even if the plan has always been under $250,000 and was not previously required to file due to being under that thresh hold. 

[TPApril]

great reminder justanother...

this is a textbook case for why not only are TPA's invaluable, but even a Financial Advisor who has at least a scant knowledge of retirement plans.  In this case they just went online and started a plan at a super cheap provider.

[Peter Gulia]

And the business might have a few years' incorrect tax returns, by claiming a deduction for contributions to a plan that was not tax-qualified.