plan start date for sole proprietor

New client has come to us.  He is a self-employed author.  He would like to start a solo-k plan.  He received his business EIN on 8/28/2018.  We are setting up the plan for him.  Can we use a 1/1/18 start date or does it have to be 8/28/2018?    Has anyone encountered this issue before and what date did you use for the plan's effective date.

plan effective date can predate existence of employer but 401(k) deferral feature can not be adopted retroactively.  There was an IRS Q&A on the subject some years ago:

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A second question is if it is permissible to have a plan's effective date precede the existence of the plan sponsor or a predecessor entity of the plan sponsor.  Thus, if we have a  brand new entity set up on 3/1/97 with a calendar year fiscal year, can we establish a PS plan with an effective date of 1/1/97, have a full 12 month plan year, and use all compensation paid during that 12 month period (which would be limited by the fact that there is no payroll prior to 3/1), and not need to pro-rate any of the regular limits?

It seems reasonable that with proper attention to the details of the plan design (including effective dates and plan years as outlined above), the issues that are of concern in this question can be avoided.  We know of nothing that prohibits provisions such as outlined above.

This question will be further addressed from the podium.

 

2 hours ago, cpc0506 said:

New client has come to us.  He is a self-employed author.  He would like to start a solo-k plan.  He received his business EIN on 8/28/2018.  We are setting up the plan for him.  Can we use a 1/1/18 start date or does it have to be 8/28/2018?    Has anyone encountered this issue before and what date did you use for the plan's effective date.

All the time. Plan effective 1/1 is perfectly fine.  A sole proprietor exists FROM HIS DATE OF BIRTH!!! Yes, you read that correctly.  The obtaining of an EIN has nothing to do with the issue. 

1 hour ago, PensionPro said:

plan effective date can predate existence of employer but 401(k) deferral feature can not be adopted retroactively.  There was an IRS Q&A on the subject some years ago:

 

I'm pretty sure I wrote that Q&A answer!!

15 hours ago, Larry Starr said:

A sole proprietor exists FROM HIS DATE OF BIRTH!!! Yes, you read that correctly. 

Maybe for some esoteric purposes but I assume you would only credit service for plan purposes from the day s/he starts actually operating as a business (?).  

4 hours ago, Bird said:

Maybe for some esoteric purposes but I assume you would only credit service for plan purposes from the day s/he starts actually operating as a business (?).  

An interesting question and not one easily answered. Suppose the individual had a newspaper delivery route in college and earned enough to have a Schedule C when he was 19 (I did).  He was a sole prop with an income at that point. Now, 20 years later he starts another business. When does service count from? Normally, this is not an issue, but it certainly can be reason for discussion. The important thing is that the sole prop is going to be 100% vested at some point anyway, so it is rarely going to be a consideration as it related to that individual.

The Q was more about eligibility and what kind of service requirement you might impose for participation.  If someone started doing business "stuff" on Jan 1 2017 then I'd use that as his/her start date and could use a 1 year elig requirement for a plan effective Jan 1 2018, and he/she would be in.  I know we both agree the date an EIN is obtained is irrelevant.  But I don't think you'd use date of birth as date of hire...?

3 hours ago, Bird said:

The Q was more about eligibility and what kind of service requirement you might impose for participation.  If someone started doing business "stuff" on Jan 1 2017 then I'd use that as his/her start date and could use a 1 year elig requirement for a plan effective Jan 1 2018, and he/she would be in.  I know we both agree the date an EIN is obtained is irrelevant.  But I don't think you'd use date of birth as date of hire...?

Ed, in this case he's a self employed author.  I' could use everybody employed on 12/31 and thereafter 1 year/SAED.  I'd not worry about vesting (not sure what I'd use for date of hire).  I'm going to guess he's been an "author" for a while, so I might ask him when he started as an author and use that date. as January 1 of that year as DOH.  I assume that will more than meet the one year/SAED requirement.

On 9/7/2018 at 4:27 PM, Larry Starr said:

I' could use everybody employed on 12/31 and thereafter 1 year/SAED

Well for this guy there is certainly no problem since he has no employees and likely never will, so we just set some low eligibility and be done with it.  But I am reluctant to use "everybody employed" on a date with an immediate change to 1 year.  I know there are boxes to check in a prototype to make that work without taking it out of prototype status, but I try not to do that due to the risk of a "pattern" of amendments being discriminatory.  And nobody can tell me it is not discriminatory to let the owner in with no service and make everyone else wait a year...

8 hours ago, Bird said:

Well for this guy there is certainly no problem since he has no employees and likely never will, so we just set some low eligibility and be done with it.  But I am reluctant to use "everybody employed" on a date with an immediate change to 1 year.  I know there are boxes to check in a prototype to make that work without taking it out of prototype status, but I try not to do that due to the risk of a "pattern" of amendments being discriminatory.  And nobody can tell me it is not discriminatory to let the owner in with no service and make everyone else wait a year...

Ed I won't tell you it's not discriminatory.  I will tell you it's not IMPERMISSIBLE discrimination!  Agreed, in this case using a one year SAED will bring him in so you don't have to go with the alternative.