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two "owner only 401k plans" in the same business?

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Asked to consult on this, and it is certainly something I've never heard of before...

Business (don't know yet if it's a partnership or an S-corp) is owned by two brothers.  Maybe 50/50.  They have no other employees.

The financial advisor set each one of them up with an "owner only 401k plan" from a brokerage house, each in one brother's individual name.

My first thought was "Hey, that's not right."  And, sure, it isn't.  But... is there a way that it COULD have been done correctly?

A business can sponsor more than one plan.  Each plan excludes... the other brother, an HCE.  If they had set up the plans as Business Plan One and Business Plan Two, there's no coverage issue, no matter what kind of [defined contribution] contributions are done.  And then you have... two legit one-person plans?  This sounds crazy.  Sure, you'd have to start filing two 5500-EZs when the combined total is $250K+, but can you really get away with this for a few years?  Is it worth it?


Of course, it wasn't set up correctly, and each brother has $400K+ in their "own plan" and no 5500-EZs (or -SFs) have ever been filed, so we've got a bunch of things to look at and fix, but... is this a legit strategy if done correctly?  I know, if you think you've got a brilliant new idea, just ask the people who have been filed/gone to jail before you, but...

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You can have two 401(k) plans that each exclude the other but why would would you want the head ache? I'm not sure if this allows you to file 2 EZs or if you have to file 2 SFs (assuming they don't need a long form because  they have some weird assets which would not surprise me given t he facts you have presented) but you can probably file 2 EZs.

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Like a lot of these small plan situations (usually driven by advisers rather than practitioners) you can do it but that doesn't mean you should do it. Why create two documents and necessitate two filings when each could have their own brokerage account under one plan? Maybe the adviser is charging each as if the only plan and able to double the take - which would be unethical - or, giving the benefit of the doubt, didn't know any better and thought it would be easier if kept separate?

Kenneth M. Prell, CEBS, ERPA

Vice President, BPAS Actuarial & Pension Services


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I have no problems having 2 separate plans in the situation you described.   The caveat here is that the both plan docs ought to be drafted with care specifying exclusions, eligibility, etc.  The only advantage is to simplify F-5500 process and this is iffy by itself (one is for surely to be forgotten if not both).  Form 5500-SF is really not a big deal, and there is only one doc required with one plan covering both brothers.

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I think we're all getting to the same point... while you COULD do this, if you do it carefully, there's no real benefit to doing it.  At least, none worth the headaches if something gets messed up along the way.

One person I mentioned it to suggested that maybe the two brothers had separate companies when the plans were created and then merged their businesses, and no one thought about how that might affect the plans.  Of course, he's an optimist and likes to assume the best in people. LOL

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  • 2 weeks later...

As you note, Albany Consultant, it is the business, whether a partnership or corporation, that must be the plan sponsor. If the purpose of the business's adoptiong two plans is so that each brother can decide on his own contribution rate beyond the 402(g) max, then the IRS could look at this as a way of evading the nonqualified CODA prohibition. Would depend on the facts.

Luke Bailey

Senior Counsel

Clark Hill PLC

214-651-4572 (O) | LBailey@clarkhill.com

2600 Dallas Parkway Suite 600

Frisco, TX 75034

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