Wants to change Solo 401(k) plan as Corp is hiring first common law employee.

A small corporation wholly owned by a husband and wife has a solo 401(k) plan that they established in 2020 and includes a 1-year eligibility provision. The plan uses a prototype document from a major financial company designed for individual owners and SE companies. The corporation is about to hire their first employee and knows that the plan needs to change, which would require a new restated document and additional help with plan administration. The financial company, which is also the trustee, states that they only provide these services to clients with 20+ participants as their minimum annual fees starts at $20,000. The corporation’s payroll service, which uses a bundled approach to administer or provide recordkeeping for the smaller companies quoted annual fees less than $2,000. However, claims that they cannot convert the prior plan to a traditional or safe-harbor (SH) 401(k) plan because the current financial institution uses unbundled services. The payroll service which uses Guidelines states that they could not setup a new traditional or SH-401(k) plan until the current solo 401(k) has be terminated for 12 months.

My goal is to find a service provider that will convert or restate this plan and provide annual recordkeeping/administrative services for a 3-participant plan for a reasonable fee.

Any takers?

What is this thing called "Guidelines" you talk about?

Guidelines is a recordkeeping company that administers 401(k) plans on a bundled basis, which I think means the get a percentage of the load fees on mutual funds and other investments in the plans they manage.

Will the client consider going unbundled? That would likely solve a lot of the issues they are experiencing. In regards to Guideline's advice - I don't see why it wouldn't be able to restate the current document, effective 1/1/2022. Then, they can amend as needed for 2023. This new hire wont be eligible until 2023, anyway, correct? 

Guideline is referring to the successor plan rules, which prohibit a Plan Sponsor from terminating a plan with deferrals or Safe Harbor funds and establishing a new Plan within 12 months of distribution. I don't see why the Plan needs to be terminated if it's a normal 401(k) Plan. Guideline can restate effective 1/1/22 and then amend to add Safe Harbor (or whatever they deem necessary) effective 1/1/2023.

28 minutes ago, #toomanyrules said:

Will the client consider going unbundled? That would likely solve a lot of the issues they are experiencing. In regards to Guideline's advice - I don't see why it wouldn't be able to restate the current document, effective 1/1/2022. Then, they can amend as needed for 2023. This new hire wont be eligible until 2023, anyway, correct?

I think the client is open to all suggestions and I agree that the plan should be able to be restated as a SH beginning in 2023. They may want to allow the employee to enter before the 1 year waiting. However, I have not checked the Plan to see how a Solo 401(k) differs from a SH-401(k).   

44 minutes ago, #toomanyrules said:

Guideline is referring to the successor plan rules, which prohibit a Plan Sponsor from terminating a plan with deferrals or Safe Harbor funds and establishing a new Plan within 12 months of distribution. I don't see why the Plan needs to be terminated if it's a normal 401(k) Plan. Guideline can restate effective 1/1/22 and then amend to add Safe Harbor (or whatever they deem necessary) effective 1/1/2023.

I also agree with this and will check to see if someone at Guidelines is either getting bad information about the facts or just does not understand. After looking at information on Guidelines they appear to be more of an unbundled service provider, since I thought that most bundled services included loaded mutual funds which are the primary source of revenue for the bundled service provider. 

9 minutes ago, kpension said:

I think the client is open to all suggestions and I agree that the plan should be able to be restated as a SH beginning in 2023. They may want to allow the employee to enter before the 1 year waiting. However, I have not checked the Plan to see how a Solo 401(k) differs from a SH-401(k).   

Solo 401(k) is just a marketing term for a 401(k) plan that is supposed to cover just owner and spouse.

Safe Harbor 401(k) is just a 401(k) with Safe Harbor provisions of either matching or non-elective contributions that meet certain conditions to get out of 401(k) testing and possibly top-heavy.

Both are simply subsets of regular 401(k) Plans.

There is no reason why the "Solo (k)" and be restated on to a different document and you could possibly restate it to a safe harbor 401(k) Plan for 2022 is they are OK with a non-elective safe harbor; the matching safe harbor you could not do until 2023 at this point.

4 minutes ago, Lou S. said:

Solo 401(k) is just a marketing term for a 401(k) plan that is supposed to cover just owner and spouse.

I know this. What I do not know is the tests required or contributions needed, if a non-owner enters the Solo 401(k) with modest or even significant deferrals. Is the plan required to run the test or are the SH contribution rules in play? That what I need to check.

1 hour ago, kpension said:

I know this. What I do not know is the tests required or contributions needed, if a non-owner enters the Solo 401(k) with modest or even significant deferrals. Is the plan required to run the test or are the SH contribution rules in play? That what I need to check.

I'm not sure I follow your question. A 401(k) plan has to pass the Average Deferral Percentage test (ADP) on 401(k) deferrals and the Average Contribution Percentage Test (ACP), if there are matching contributions. A safe harbor plan is exempt from the ADP (and ACP) tests if it meets certain requirements spelled out in the code.

Are you the Sponsor, Financial Advisor or TPA?

I am a pension consultant that is assisting the company's financial advisor. I focus on 1-participant plans and try to avoid plans that have common law employees. None of my clients have employees other than family members.  Just trying to get the financial advisor pointed in the right direction. I was going to suggest that he could post directly to this forum board and still might.

Have you tried to simply Google 401k TPAs near you?   Get a local firm which most likely does this line of business.  A lot of people I know pretty much run their whole TPA business model on small plans like this. 

On 3/2/2022 at 1:36 PM, Lou S. said:

I'm not sure I follow your question. A 401(k) plan has to pass the Average Deferral Percentage test (ADP) on 401(k) deferrals and the Average Contribution Percentage Test (ACP), if there are matching contributions. A safe harbor plan is exempt from the ADP (and ACP) tests if it meets certain requirements spelled out in the code.

This is a Fidelity prototype document, that uses different adoption agreements for different types of Defined Contribution Plans. The Adoption Agreement AA that is being used is No. 003, which is call Self-Employed 401(k) and is intended for companies, incorporated or not that have no common law employees.  The Basic Plan have all the rules including the SH that apply if elected in the AA. Since AA No.003 does not include SH as an election it cannot be a SH-plan, which is what I meant about checking plan to confirm that the default was completing the ADP test verses meeting the requirement of a SH plan.   

You did the right thing at the very beginning, which is to ask if there are any takers.  It's a fairly standard design that just about anybody who knows anything (which is unfortunately a high bar) could handle.  Maybe provide your geographic area, not that being in the area is a requirement, but it might trigger a more on-point response.

2 hours ago, Bird said:

Maybe provide your geographic area, not that being in the area is a requirement, but it might trigger a more on-point response.

I thank you all for your suggestions. The corporation that sponsors the plan is in Imperial Beach CA (South San Diego County).

My company, The Retirement Advantage, can help and has very competitive fees. I can introduce you to our Regional Sales Consultant in Southern California.  Send me an email if you would like to speak:  David.Danziger@TRA401k.com.