Transition Safe Harbor 401k to solo 401k?

Pros, have a client that went and set up a 401k for his real estate brokerage business with a 1/6/23 effective date.  His intent was to set up a solo 401k.  Using a DIY 401k vendor, he ended up setting up a full-blown safe harbor 401k w SHNEC (EACA provision, 25% SHNEC, cross-tested profit sharing).  The only eligible employees are himself and his spouse.  His minor children are employees of the corporation but excluded from the plan due to age 18 eligibility requirement.  I would like to move the plan to a new vendor and drop the safe harbor provisions as they're unnecessary.  He's fully funded the plan for 2023 for himself and his wife (maxed EE deferrals and the max ER contribution--25% of w2)

Is there an issue with simply changing plan docs midyear to one without the safe harbor language?  Is there some notice that must be sent to covered EE's?  Thank you.

Short Answer: Yes, a mid-year change to the safe harbor generally requires 30 days notice, and accrues through that date. In addition to the amendment (which would be accomplished with the update onto the restated doc). 

Long Answer: what provisions are unnecessary? Is the Safe Harbor NHCE only? Are you wanting to change the EACA and cross-testing as well?

He has a solok. The fact that it has provisions he might not use doesn't make it not a solo k .  If the only two people eligible are him and his spouse, that's a owner only plan. Doesn't matter what the document is marketed as. Solo K is a marketing term, not a technical term. 

How is everything max out already based on 25% of W-2? Most people don't have final W-2 wages until December? are they at 415 limits for the year? 

Individual grouping (the cross testing) is super handy if the deposits don't occur exactly pro-rata. As long as testing passes they can be differing %. 

I'm guessing the EACA was put in for the tax credit, even if its never used. 

Hopefully the service requirement is 1 year, I've seen way too many employers think they will never hire someone and they do and that person is immediately eligible because that's how the plan is written. Having safe harbor to NHCE only also tends to help with this just in case it happens. 

Thank you justanotheradmin.  this is very helpful and I think i know where to go from here.  The client immediately w2'd himself and his wife $25,000 each from his s-corp right after establishing the plan.  Then, deferred the entire amount (after FICA) and made an immediate SHNEC contribution of 25% or $6250 for him and $6250 for spouse.  He generally doesn't take much of a salary from his S-Corp...something I've been on him for a few years about.  He likely will not take any more salary for the rest of the year.  But that's how he's "fully" funded the plan for 2023 already.  He's been a real estate broker for almost 20years and makes most of income from flipping houses now.   The biggest reason for the move is to get client's fees down from $1740/yr to $250/yr.  He's being charged for admin services (form 5500 filing and producing safe harbor notices) as well as ERISA-related services (distributing 404a notices, QDIA notices etc.) which are all unnecessary for this plan.    

No service requirement in the current plan🙄

On 6/16/2023 at 6:07 PM, jpdrews said:

The client immediately w2'd himself and his wife $25,000 each from his s-corp right after establishing the plan.  Then, deferred the entire amount (after FICA) and made an immediate SHNEC contribution of 25% or $6250 for him and $6250 for spouse. ... He likely will not take any more salary for the rest of the year.

Hopefully you've advised the client about the annual additions limit...

Thank you C.B. Zeller.  Yes we've spoken on the limits.  Sometimes I feel like Winston Wolf from Pulp Fiction. Appreciate you both taking the time to comment.

4 hours ago, Larry Starr said:

THERE IS NO SUCH THING AS A SOLO 401(K) PLAN!

It's up there with "a 1099 employee of mine"...

8 hours ago, Larry Starr said:

I can't help but comment: THERE IS NO SUCH THING AS A SOLO 401(K) PLAN!  There is just plan documents that are crippled and probably screwing up clients all the time (we know that's true: they often end up on our doorstep and we have to "fix" things).  If he never hires a real employee, his existing plan document can do all you need to.  If the plan was well drafted, there should be a provision that says HCEs don't need to get the Safe Harbor allocation (but you CAN give them a PS allocation if the client desires).  You can amend the plan to eliminate the safe harbor provision, but it likely doesn't matter.  Hopefully, as noted by another, there is the standard 1 year/ age 21/ semi-annual entry date provision, which a lot of so called "solo 401(k) plans" have hard wired as immediate entry; that's a problem if, g-d forbid, he hires someone for even one day. They also tend to be hard wired for immediate 100% vesting; also should be avoided just in case they ever hire someone.  Again, the "solo 401(k)" document is just a crippled document with bad provisions.   

Bottom line: if your plan document is a good one, then just modify anything you really don't want and keep it.  As far as moving it to a "new vendor", if you are just talking about the investment, a non-participant directed, pooled plan would make the most sense for this situation and those changes can be made to the plan document and you can invest the funds with anyone you want.

Welcome back, Larry!

I regret including the term "solo 401k".  thank you all for taking the time to respond.