Is the Plan Terminated?

[Basically]

A single member plan (Solo) wants to roll out the balance of her plan into an IRA.  She is not closing down her business, but she is ceasing her contributions to the plan.  She would like to keep the plan around in case she decides to make a contribution at a future date.  

I know that a plan that does not receive a contribution for 3-5 years means that everyone is 100% vested.  Not an issue here with this plan being a single member plan.  But can she do this?   Empty the plan out and keep it around with a small balance, $1,000 or so?  

Thanks

[Bri]

Does she qualify for any sort of in-service withdrawal under the terms of the plan?

And if it's only her account balance in the plan, I'm at least curious as to why she'd prefer the IRA over the plan trust.

[Belgarath]

Perhaps the plan is subject to 5500-EZ requirements if assets aren't rolled out?

[Basically]

She already has been filing a form 5500, and that brought up another question I am always weary about - Regardless of whether a plan dips below the $250k mark because the assets just aren't worth as much or due to a distribution, is a 5500-EZ required to be filed?  

I'm of the mind to tell her to just terminate the plan and if in a couple of year she wants to open another one just do it.  Is there any reason she can't do that?  I mean, does the plan need to be gone for a certain number of years before she can open another one?

[Belgarath]

It USED to be that once you exceeded the limit, you had to keep filing, even if you dropped below the threshold. However, that changed some number of years ago, although I can't recall off the top of my head. So no, you wouldn't have to file, other than a final when you terminate it. As to your other question, google "401(k) successor plan rules" and you'll doubtless find the information you need.

[david rigby]

This smells funny.  As mentioned by @Bri, what is the supposed advantage of using an IRA vs. a plan trust?  Why take the action of removing/terminating?  As we have seen before, sometimes it's because of the "brother-in-law" influence.  Is someone suggesting this course of action because the "suggester" might have a possible benefit?  If you want to be an "order taker", just do what the plan owner says; if you want to be a consultant, ask questions.

[Basically]

Will do Mr. Rigby.  Thanks

And I did look up successor plan rules.  This sponsor is older than 59-1/2.  IDK what her thoughts are.  I'll ask questions!

[Bill Presson]

I've seen this occasionally when an owner/participant wants to take distributions on a regular basis. It's much easier and cheaper to get an IRA distribution than it is to get one from the plan (if done correctly). It's usually when the owner wants to continue making contributions as well, but also if there are illiquid assets in the plan.

[CuseFan]

2 hours ago, david rigby said:

If you want to be an "order taker", just do what the plan owner says; if you want to be a consultant, ask questions.

David, that is an awesome statement and so true!

[Paul I]

Regarding the EZ, the instructions for the form are explicit:

"Who Does Not Have To File
Form 5500-EZ
You do not have to file Form 5500-EZ for the 2022 plan year for a one-participant plan if the total of the plan’s assets and the assets
of all other one-participant plans maintained by the employer at the end of the 2022 plan year does not exceed $250,000, unless
2022 is the final plan year of the plan."

What they don't say is if you file a 5500EZ in one year and do not file one in the following year, there is a good chance your future holds getting an IRS letter asking why there was no subsequent filing, or worse, you get a letter saying you owe a bazillion-dollar penalty.  Either way, it creates an unnecessary interaction with the IRS.

If the plan terminates, it will need to file a 5500EZ regardless of the amount of assets indicating the filing is the final filing. 

Once the participant reaches RMD age, the plan will have to pay an RMD in addition to any RMD paid from the IRA or IRAs.  If the individual has multiple IRAs, the amount of the RMD is calculated based on the amounts in all of the IRAs, but the individual can choose the IRA or IRAs from which the RMD is paid.

The above are practical reasons for terminating the plan now.

On the other hand, we have a client who has an emotional attachment to their solo plan.  To them, terminating the plan is like deciding to retire and they are not prepared to acknowledge that there most productive years are past.

[Belgarath]

Any possibility that the 401(k) plan could provide stronger asset protection in the event of lawsuit judgement awards (as opposed to the protection available under an IRA? I'm not referring to bankruptcy, which is a separate issue.) Of course, if there IS stronger protection, and the client is concerned about it, then maybe they shouldn't toll out in the first place.

[Bird]

On 4/14/2023 at 4:01 PM, Paul I said:

What they don't say is if you file a 5500EZ in one year and do not file one in the following year, there is a good chance your future holds getting an IRS letter asking why there was no subsequent filing, or worse, you get a letter saying you owe a bazillion-dollar penalty.  Either way, it creates an unnecessary interaction with the IRS.

Exactly this. In theory you can just distribute some of the assets and not file an EZ, but in practice it will trigger an inquiry from the IRS. The savings from not just terminating (or leaving it alone and continuing to file) will not exceed the hassle of dealing with the inevitable inquiry arising from not filing.

[Paul I]

4 hours ago, Belgarath said:

Any possibility that the 401(k) plan could provide stronger asset protection in the event of lawsuit judgement awards (as opposed to the protection available under an IRA? I'm not referring to bankruptcy, which is a separate issue.) Of course, if there IS stronger protection, and the client is concerned about it, then maybe they shouldn't toll out in the first place.

There used to be a concern the assets in an IRA were not protected from creditors in case of bankruptcy, whereas assets in a qualified plan were protected.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) protected the up to $1,000,000 in iRA assets from creditors in case of bankruptcy.  That limit is subject to annual adjustments and now exceeds $1,500,000. 

If the assets in the solo 401(k) described in the original post exceed this amount and there is a concern about a potential bankruptcy, then that should be considered in deciding whether to move funds from the solo 401(k) to an IRA.

 

[Ken Marblestone]

If the plan is kept around, there's also the continuing necessity of restating and adopting such amendments as may be required.