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Converting two Solo 401k plans into one when you have an LLC and are self employed 


ill

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Hello all, hoping for some advice/clarity on this topic.

A few years ago, my spouse and I started self employed activities. After checking with our CPA we opened two solo 401k plans (one for me and another for my spouse). We did not contribute our self-employed income to our solo 401(k). At that time, we were changing our w2 jobs and we had to move out of our 401k funds. We could put 410k funds in trad IRAs but it would block us from backdoor roth conversions. So we used our solo 401k accounts and put our funds there (my spouse's 401k funds went to her solo 401k and my 410k funds went to my solo 401k). 

We continue self-employment activities and recently opened an LLC (taxed as qualified joint venture) for new project. 

I talked with TPA and they said that all self employed activities and LLC income should go under one solo 401k plan. So now we are starting to think about a way to fix this situation and consolidate our solo 401k plans. 

TPA suggested the following course of action:

1) You will select "restatement on the application," You will use your current plan name. However, you can input your new LLC and EIN. On the application you will choose your desired trust name and we will obtain and EIN for that trust name.

2) We will be giving you a new adoption agreement.

3) Do trustee-trustee transfers from Fidelity solo 401 accounts

4) Close Fidelity solo 401 accounts

I have a concern regarding this new solo 401(k) plan that you described above. It says this plan would be linked to the LLC and its EIN. Does it mean that the solo 401k plan will not be protected by "limited liability" and that anyone who may sue LLC may claim the new solo 401k plan funds as well (assuming there is no "piercing the veil")? What would happen in the event that an LLC is disallowed (closed)? Is it possible to create a "general purpose" LLC plan that would allow my spouse and me to contribute earned income from the LLC as well as from self-employed activities and not depend on the LLC?

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Do you and your spouse have two different businesses for your self-employed activities or is it one business?

[edit] I see that you opened an LLC for a new project; is that taxed as a partnership? Do you still have other separate businesses?

Ed Snyder

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For starters, the assets in any and all of your 401(k) plans have all of the protections from lawsuits as are available to you.  You can take that concern off the table.

You are not violating any rules by having multiple 401(k) plans, but you are making life much more complicated than it needs to be.  The multiple 401(k) plans do not allow you to contribute any more to them in the aggregate than you can contribute to a single 401(k) plan.  (We can save for another time talk about pairing the 401(k) with a defined benefit plan.)

The TPA is suggesting that you consolidate plans into a single plan by picking one of the existing plans and merging in the others.  Technically, you want to add each of the other businesses as related employers of the plan sponsor.  From the way you described the businesses, they all seem to be 100% owned by you and your spouse.

The each plan that merges in will need to file a final Form 5500-EZ even if all of the assets collectively held in all of your plans do not exceed $250,000.  This is a relatively small but necessary expense to closing out those plans.

I am sure you went into these arrangements fully informed of the perils of having common law employees become eligible in these plans.  Continue to be diligent about this or you will wind up having to deal with a host of additional compliance rules.

By the way, if you still have W-2 jobs with companies you don't own, and those companies have retirement plans for which you are eligible, you can participate in those plans, too.  Just don't exceed the annual deferral limits in total.

It sounds like the TPA is on top of things. 

Good luck with your business ventures!

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