solo LLC wants 2 401k plans

[doombuggy]

So I have an owner of an LLC who is the only employee.  She owns her company 100% and her company is a participating ER of the plan that her husband's company (another owner only LLC) that sponsor's the plan.  It is a control group for now anyway, thanks to Secure 2.0.

She has been talking to someone other than us (her TPA) and her broker and thinks she can open a 2nd 401k plan.  Since her company is an adopter of the plan she is currently in, wouldn't she be prohibited from creating a 2nd 401k plan?

Since there will no longer be a control group next year because of the family attribution changes, she could spin off her own plan, right?  I have done a small handfull of mergers, but this is the opposite and am not sure how this would be handled...

[CuseFan]

I think there are various options, but the successor plan rules are designed to prevent premature in-service distribution of salary deferrals on plan termination. I don't think those should prevent a new plan or spin-off - however she wants to get her own plan - provided it does not result in a prohibited distribution. Two overlapping plans is a recipe for compliance mistakes in my opinion, and further complicates the situation if her husband's plan covers employees of his business.

[Lou S.]

Why not just spin off in 2024 when they are no longer a controlled group instead of creating potential compliance problems for both plans by doing it in 2023?

[doombuggy]

36 minutes ago, Lou S. said:

Why not just spin off in 2024 when they are no longer a controlled group instead of creating potential compliance problems for both plans by doing it in 2023?

She apparently is looking to invest in Real Estate.  She wants to take $50k in assets out of the plan she is in now and invest it in real estate under a 2nd 401k plan that I guess would be titled under her company name.  Each of these companies only have 1 employee - the owners - so I don't understand how her company could be a participating ER of XYZ LLC 401k Plan and open a plan under her own company name.  Wouldn't that be sponsoring 2 401k plans for the same person/group of people?  It's not like there is a group of union employees that the company sponsors a plan for and a 2nd plan that they sponsor for the non-union employees...

[Lou S.]

If the Husband and Wife are the only employees, then you will be fine. If the husband's plan covers any employees you are going to have a BRF problem if she's allowed to invest in real estate and the rank and file employees are not.

As to why she's adopted on to his plan, the answer is they likely have minor children making them a controlled group --- until that changes next year with SECURE 2.0 provision and they are no longer CG due to minor child.

But spinning her off into a new 401(k) Plan for her company would seem to be the way to go whether it is this year or next year. Just make sure they know the pitfalls if an employee becomes eligible before 1/1/2024.

[Paul I]

I agree that this is a recipe for disaster.  I am curious on how she plans to take $50K out of the current plan and move it to the 2nd plan.  That potentially yet another layer of risk. 

If the $50K is an indicator that she it thinking of taking a loan from the current plan, there still are potential issues getting the $50K into the new plan.  If it is a contribution, it would not take much of a contribution to the old plan to blow up the 415 limit.

On another note, the real estate will be owned by the plan's trust and not titled in her company name.

[doombuggy]

17 hours ago, Lou S. said:

If the Husband and Wife are the only employees, then you will be fine. If the husband's plan covers any employees you are going to have a BRF problem if she's allowed to invest in real estate and the rank and file employees are not.

As to why she's adopted on to his plan, the answer is they likely have minor children making them a controlled group --- until that changes next year with SECURE 2.0 provision and they are no longer CG due to minor child.

But spinning her off into a new 401(k) Plan for her company would seem to be the way to go whether it is this year or next year. Just make sure they know the pitfalls if an employee becomes eligible before 1/1/2024.

Yes, they apparently do have minor children, hence the control group.  I do think that a spin off would be the way to go, but this 3rd party IRA company seems to be telling her that it ok for her to be a participating ER in XYZ, LLC 401k plan and still have a 2nd plan of her own.  

[doombuggy]

15 hours ago, Paul I said:

I agree that this is a recipe for disaster.  I am curious on how she plans to take $50K out of the current plan and move it to the 2nd plan.  That potentially yet another layer of risk. 

If the $50K is an indicator that she it thinking of taking a loan from the current plan, there still are potential issues getting the $50K into the new plan.  If it is a contribution, it would not take much of a contribution to the old plan to blow up the 415 limit.

On another note, the real estate will be owned by the plan's trust and not titled in her company name.

Correct.  She has r/o and PS in the plan but the plan only allows for a disbursement due to termination or death...

The plan would need to be amended to allow for a w/d of r/o at anytime and maybe a young in-serv for the PS assets.

I have told the broker that the plan would own/hold the real estate (been down this road before) but I am not sure they "get it."

I agree it could be a problem waiting to happen...☠️

[Paul I]

You may want to point out to the owner that investing in real estate from inside a qualified plan does not have anywhere near the same preferential tax treatment she may get by personally directly investing in real estate.  Taxable distributions from the plan generally are all subject to ordinary income tax rates and do not benefit from capital gains rates.

I also hope she has no personal connection with the real estate in question that would make this a prohibited transaction.

[Connor]

On 6/12/2023 at 11:24 AM, doombuggy said:

So I have an owner of an LLC who is the only employee.  She owns her company 100% and her company is a participating ER of the plan that her husband's company (another owner only LLC) that sponsor's the plan.

If the presumption is that both companies only employ their respective owner, can't she talk her husband into amending his plan to allow for the RE investment, participant direction, etc?  A second plan would not be needed.

[doombuggy]

4 minutes ago, Connor said:

If the presumption is that both companies only employ their respective owner, can't she talk her husband into amending his plan to allow for the RE investment, participant direction, etc?  A second plan would not be needed.

The plan does allow for the RE investment, but what she was trying to do with this third party was remove assets from the current plan, create a new plan and have that plan hold the RE investment.  

I did just start a new topic about how to "unadopt" into a sponsor plan, as I was talking with a co-worker who is faced with the same problem, except in her client's plan, the sponsor of the plan has employees, while the spouse who is an adopting er, doesn't.  In my case, where it is just two companies where the owners are the only employees, it might be fine to leave it as is and let it be an multiple ER plan.  But I keep telling the broker that she can buy RE in the current plan, but I think they don't quite understand that the property would be owned by the plan not the person, and that she can't take assets out of the plans as described above.  I think I need a drink!  😂

[Stephen Abramson]

Although she can adopt a second plan in the name of her company as long as the two companies remain as a controlled group the limits apply in the aggregate, i.e., one 415 limit and one 402(g) limit.  At the time the two companies are no longer controlled the 415 limit applies to each plan separately but the 402g limit it attached to the participant so she would have only one deferral limit whether she participates in her 4k plan or her husband's 4k plan, the maximum deferral in total would be $22,500 plus $7,500 catch-up if eligible for 2023.

Steve Abramson, CPC, President

APS Pension Services LLC

[acm_acm]

On 6/12/2023 at 4:02 PM, doombuggy said:

She apparently is looking to invest in Real Estate.

Red flag number 2.

[ESOP Guy]

4 hours ago, acm_acm said:

Red flag number 2.

You might want to search the term "real estate" on this board to see all the problems RE can cause in a qualified plan.