Existing solo 401k but has employees

Ok, here is another troubled case that is on my desk for consultation. I provided them with some information but wanted to check if someone who has experienced the following.

This is a new one.

Single member LLC filing as sole-prop and has employees for the past 7 years.

Sole-prop - Joe has an existing solo 401k plan. Stopped contributing when hired employees. Never informed the custodian of the solo 401k that he hired employees. Never informed the employees about the existing plan. Never filed 5500 forms (assume less than 250k in assets).

My take:

• As all employees are eligible to participate in the 401k plan and are participants, 5500 forms needed to be filed even if the only account balance is for the owner. So possibly missing 5+ years of filings no matter is the account balance
• All eligible employees should have been provided option to defer and now in violation and therefore need to be provided some kind of missed opportunities.
• How will the custodian handle the fact that they were never told the plan cannot be a solo plan?
• Not even sure if the documents are up to date

Other than hiring an attorney to fix all this, what else can be done?

They want to set up a cash balance plan for 2021 combined with 401k plan. I can amend the 401k plan for 2021 but how about with all missed opportunities etc?

Wow.

On 11/5/2021 at 4:33 PM, Jakyasar said:

How will the custodian handle the fact that they were never told the plan cannot be a solo plan?

It is likely that the terms of the agreement does not require them to take action,  other than resigning if they know that the plan has not been amended. I am assuming that this is a prototype, because of the "soloK reference".

I wish I could provide helpful responses. But, engaging an ERISA attorney is the only solution I come up with.
Good luck
 

This is a classic example why the silly and artificial term "solo 401(k)" is so terrible. 

It is a marketing term not a legal term.   This guy had a 401(k) plan as there is no such thing as a solo 401(k) plan in the law.  However, by some marketer adding the "solo" in front of the term 401(k) it most likely gave this person the impression this was different than a regular 401(k) plan that has to cover employees. 

First thing would be to RTFD to see what it says. there probably isn't any special language that helps, but it should be checked.   

But this one screams for consultation and advice under attorney-client privilege.  IRS, DOL and/or participants could all cause trouble for this employer. 

Sherpa, what is RFTD?

49 minutes ago, Jakyasar said:

Sherpa, what is RFTD?

Read The F*^(&$# Document.

1 hour ago, Bill Presson said:

Read The F*^(&$# Document.

 

Or Read The Fantastic Document.   Bill's mind is in the gutter!!! 😆

Bill's explanation is better but one would hope that there is a TFD, at least not that one is provided to me.

Before you start down that road, did any of those employees satisfy the eligibility requirements of the plan?

One thing to examine is your firm's procedures regarding "EZ" plans.

Our year-end correspondence always asks if the client hired any employees during the year, whether part time or full time, whether they were there at EOY or not.

And who told him to stop contributing?  Did he do that on his own?  On the advice of his accountant?  His TPA?

At least he stopped contributing after hiring employees.  How many employees?  Maybe the missed opportunity and lost earnings will not be that bad.  Probably go VCP?  At least no top heavy since he didn't contribute after hiring employees...