How many § 401(a)-(k) plans cover no employee?

Recently, I was asked for advice on State-law fiduciary issues about a retirement plan.

The plan’s sponsor, a profit-seeking limited-liability company (treated as a partnership for Federal income tax purposes), has no employee, and no intent to hire an employee. Everyone who works in the business is an LLC member. And yes, I checked that the LLC interests are real, and not a sham to evade treating a worker as an employee.

How often does this happen—that every worker is a partner, an LLC member treated as a partner, or otherwise an owner treated as not an employee?

Does it happen often enough that a service provider would plan for these situations?

That's the definition of an owner only plan.

Yes, I am asking about owners-only plans.

How often does it happen? Is an owners-only plan a regular aspect of a TPA's practice?

We have a bunch.  Though many of them are sole proprietors.  Or small professional company where the only staff, if any, work less than 1,000 hours.

BG5150, thank you for your information, which helps me.

In your work, do you encounter issues or questions that come up because ERISA’s title I does not govern the plan? Or because State law governs the plan?

We have a large number of them as well. As BG mentioned, the vast majority are single owner (sole prop, single member llc, single owner s corp), but it's not unusual to have multiple owners and no employees. And we do ask.

I haven't run into issues historically, but I'm very curious where this thread is going.

Bill Presson, thank you for your helpful information.

Of my clients, there is no small-business plan sponsor/administrator I advise, and even my indirect experience from advising law, accounting, and actuarial firms and retirement-services providers is rather limited. That’s why I sometimes ask BenefitsLink neighbors to share experiences.

A mid-size law firm I advise asked for my advice about a non-ERISA plan’s trust and investment arrangements. That got me wondering about how often TPAs work with only-owners (not just one owner) plans. And about what differences one might face because State law, rather than ERISA’s title I, governs a plan.

For some points, differences are slight because meeting Internal Revenue Code conditions for § 401(a) treatment results in many provisions ERISA §§ 201-210 would require or permit.

But for some points about participant-directed investment, investment managers, investment advisers, co-fiduciary responsibility, trusts, prohibited transactions, and other fiduciary law issues, there can be meaningful differences between ERISA and a State’s law.

Does this affect a TPA’s work? Or are the fiduciary points beyond a TPA’s usual work?

I imagine no fiduciary issue is raised for a plan with only one owner/participant. But what about a plan for several partners, with not all of them involved in the fiduciary decision-making?

2 hours ago, Peter Gulia said:

In your work, do you encounter issues or questions that come up because ERISA’s title I does not govern the plan? Or because State law governs the plan?

To be honest, we just check that the contributions are within the limits and send/file the 5500-EZ each year as needed.  In our annual cover letter we remind them to let us know if they have any employees, even if they are 'part-time' workers.  We also tell them to contact us BEFORE any withdrawals are made.  Other than that, everything else is up to the accountant.

Another curiosity, how many of these plans have an investment adviser, and how many lack an investment adviser?

Peter, any chance the filters here, https://www.efast.dol.gov/5500Search/, might be useful?

Thank you for this great help.

While there is a filter for plans coded as including self-employed individuals, I see nothing to capture a plan with only self-employed individuals.

And while there are many employer and plan codes, I see none about service codes.

But thank you for your smart thinking.

3 hours ago, Peter Gulia said:

But for some points about participant-directed investment, investment managers, investment advisers, co-fiduciary responsibility, trusts, prohibited transactions, and other fiduciary law issues, there can be meaningful differences between ERISA and a State’s law.

ERISA provides (and, although I readily admit my lack of expertise in this area, I have to guess that so do most states' laws provide) civil penalties for a participant to recover against a fiduciary in the event of a breach of their fiduciary duty. However in a plan that covers only the owner of a company, the fiduciary and the participant are typically the same person. I struggle to imagine any scenario in which a person would be inclined to sue themselves. In the case of a plan which covers, for example, two or more partners in a partnership (and no employees) then I could see a potential issue, but even then you have one partner suing another which is likely to involve much more than just the retirement plan.

I am curious about what sorts of situations you had in mind when you posed this question. As I said, my knowledge of states' fiduciary and trust law is very limited so it's entirely possible there is some subtlety I am missing.

Regarding prohibited transactions, a 401(a)-qualified plan is still subject to Code section 4975.

For what it's worth, I have never had the sponsor of a plan which covers only owners ask me about fiduciary issues (although I have had a number ask me if a particular action would be a prohibited transaction...in those cases, if they have to ask, the answer is usually yes).

Considering today’s information, my inferences are:

Many non-ERISA plans involve only one owner.

A participant who is the owner is unlikely to assert a fiduciary-breach claim against herself.

A participant who is the owner’s spouse is unlikely to assert a fiduciary-breach claim against the owner/fiduciary (if the marriage remains content).

Some non-ERISA plans involve several owners.

Even if a participant/owner was not involved in the fiduciaries’ decision-making, such an owner is unlikely to assert a fiduciary-breach claim against her partner (unless there is another reason for discontent).

At least non-tax fiduciary points are beyond a TPA’s usual work.

Even if understanding differences between ERISA and non-ERISA fiduciary law might bear some academic interest, there’s not much here for practitioners.

Thank you, friends, for your good help.

I think a lot of non-ERISA retirement plans never realize that they are not subject to ERISA. I have often wondered why I have never seen a case (maybe there have been some) where, e.g., partners at a small law firm, got into a dispute about the plan, e.g. its investments, and were forced to litigate under state law. I'm sure that would get some press because would be of great interest to community, but it does not seem to happen. Needless to say, there has not been much development in state trust law for employee benefit plans since 1974.

I think I've seen some pre-approved plans that actually state the rule that the plan will not be subject to ERISA if it meets the exception, but I'm not sure, and I don't think I've ever seen one that follows on from that and says that if the exception does not apply, the 404(c) and other ERISA rules in the plan may not apply.

I also don't think there is much guidance on what happens where a plan comes in and out of the definition of an employee-less plan. Once it falls out of the definition, is it always subject to ERISA, even after the account for the non-owner has been fully distributed?

6 hours ago, Luke Bailey said:

I also don't think there is much guidance on what happens where a plan comes in and out of the definition of an employee-less plan. Once it falls out of the definition, is it always subject to ERISA, even after the account for the non-owner has been fully distributed?

Good question.  Although not exactly on point, there is PBGC guidance on a similar Q:

https://benefitslink.com/boards/index.php?/topic/53556-waiver-of-benefits/#comment-232518

18 hours ago, Peter Gulia said:

While there is a filter for plans coded as including self-employed individuals, I see nothing to capture a plan with only self-employed individuals.

I doubt you would find anything on the 5500 search site.  Plans that cover only owners (and spouses) sometimes file a 5500-EZ and those aren't open to public inspection.

And many times, I would think, the financial adviser to the plan would be the FA for the owner or one of the partners.  Either that, or they are using one of the big-box plans and have a generic adviser (a la Fidelity).

Typically owner-only plans make up 10-20% of the TPA book, with multiple owner entities comprising about 20% of them, usually partnerships or a successors arrangement with a younger minority arrangement.  Almost all will have a financial advisor involved; but usually SDBA accounts with each owner engaging his own advisor.  Biggest issue is lack of formal Plan Document, too many brokerages make it seem like their account application will cover the doc requirements in these arrangements.

As a TPA, my focus is on providing services centered around ERISA and related IRS/DOL regulations; state law is only considered specific to particular divorce and maybe probate benefit situations when invoked.  Even where ERISA may not apply, I'll lean on those precepts for guidance and shape my communication accordingly. 

On 6/14/2022 at 2:41 AM, BG5150 said:

I doubt you would find anything on the 5500 search site.  Plans that cover only owners (and spouses) sometimes file a 5500-EZ and those aren't open to public inspection.

And many times, I would think, the financial adviser to the plan would be the FA for the owner or one of the partners.  Either that, or they are using one of the big-box plans and have a generic adviser (a la Fidelity).

I've always wondered about this.  In the upper-right box under the YEAR, the form clearly says the for is open to public inspection.  Maybe not on the EFAST website, but I would think that it can be obtained from the DOL Public Disclosure Room.