UNIK ower dies. Can we make a post death profit sharing contribution?

One of our clients had an accidental death.  She has a husband but her business is real estate.  He can receive her post death commissions for a time.   Can a contribution be made for the 2018 plan year for her?  

Does the participant have income as defined by the Plan for 2018 prior to her death?

Does the Plan say that participants who die during the Plan year receive a share of the allocation?

Will  the person who now controls the business declare a profit sharing contribution for 2018?

If the answer to all 3 is yes I don't see a problem.

Thank you Lou.  Yes to all 3.

22 hours ago, Pixie said:

Thank you Lou.  Yes to all 3.

Wait a minute; before you say YES to #1, was she a W-2 employee of her real estate firm so that she had W-2 income prior to death?  Or was she a self-employed individual with a Schedule  C?  I've had a ton of these over the years and they are always self-employed.  Self employed individuals are treated as having their income determined as of the last day of the year. Since she didn't make it that far, she may have no income for the year as an employee.  What happens to the money she earned? Ever hear of income in respect of a decedent?
 

Income in Respect of a Decedent (IRD) refers to untaxed income which a decedent had earned or had a right to receive during his or her lifetime. IRD is taxed to the individual beneficiary or entity that inherits this income.

Well, note who gets the income!  Not your dead spouse! Therefore, no income for the year and no plan contribution.

So, was she really a W-2 employee?  If she was, I bet you wouldn't have asked the question......

Just curious what does "UNIK" stand for? 

I am sure it is the same as the equally meaningless "Solo 401(K)."

On 12/12/2018 at 5:04 PM, ESOP Guy said:

Just curious what does "UNIK" stand for? 

It's a brand name given to a 401(k) plan for which only the the business owner/s  is/are eligible to participate. Different companies use different brand names, including Individual-(k), Solo(k), and Uni(k). Once upon a time, it might have been called a Keogh 401(k).  It's still just a 401(k), but the branding sends a message to the self-employed, that the plan can be adopted without worrying about the usual high volume paperwork, testing and 5500 filing that usually applies to 401(k) plans. ( 5500 filing is usually required only when assets exceed $250,000.

My recollection is that those "brands" didn't come into existence until the significant liberalization of the rules in the 2001 tax legislation (which made one-person 401k plans better than one-person SEPs).  

16 hours ago, Appleby said:

It's a brand name given to a 401(k) plan for which only the the business owner/s  is/are eligible to participate. Different companies use different brand names, including Individual-(k), Solo(k), and Uni(k). Once upon a time, it might have been called a Keogh 401(k).  It's still just a 401(k), but the branding sends a message to the self-employed, that the plan can be adopted without worrying about the usual high volume paperwork, testing and 5500 filing that usually applies to 401(k) plans. ( 5500 filing is usually required only when assets exceed $250,000.

And it's wrong to say "only the business owner/s is/are eligible", because that is never true.  IF the business owner hires an employee who meets eligibility, that employee WILL become eligible for the plan. The problem is that the business owner was "sold" a plan that "only covers him/her".  We are working on a consulting case right now where the owner ran his own "solo k" plan for 5 years and when asked why the employee wasn't in it, he said "because this plan only covers me".  Yeah, right!  But try to go sue the idiot who told him that and set it up at some know-nothing brokerage house.  Now the client is saddled with making it all right, at a very large cost!!!!

THERE IS NO SUCH THING AS  A SOLO-401(k) (or any other name given to it)!    It is simply a 401(k) plan that happens to have only one person in it (and usually, is a terribly designed plan in addition).

OK: down off the soap box..........

17 hours ago, jpod said:

My recollection is that those "brands" didn't come into existence until the significant liberalization of the rules in the 2001 tax legislation (which made one-person 401k plans better than one-person SEPs).  

You are on the right track... This is one of the 'products' that came out of EGTRRA, . And , they are also better than just a profit sharing plan, depending on the individual's compensation amount. Under EGTRRA, salary deferral was no longer counted for purposes of the maximum deductible contribution limit.

1 hour ago, Larry Starr said:

And it's wrong to say "only the business owner/s is/are eligible", because that is never true.  IF the business owner hires an employee who meets eligibility, that employee WILL become eligible for the plan.

 

It is true . Those plans are designed for that very purpose. If common law employees become eligible, then the business would have to amend the plan to a regular 401(k) plan.

1 hour ago, Larry Starr said:

 The problem is that the business owner was "sold" a plan that "only covers him/her".  We are working on a consulting case right now where the owner ran his own "solo k" plan for 5 years and when asked why the employee wasn't in it, he said "because this plan only covers me".  Yeah, right!  But try to go sue the idiot who told him that and set it up at some know-nothing brokerage house.  Now the client is saddled with making it all right, at a very large cost!!!!

 

You have a case where someone who do not understand the rules sold a product to your client, for which your client was not eligible. That does not mean that the product is nonexistent. A Roth IRA would still be a a Roth IRA, even if it is sold to someone who had too much income to be eligible for it.

1 hour ago, Larry Starr said:

THERE IS NO SUCH THING AS  A SOLO-401(k) (or any other name given to it)!    It is simply a 401(k) plan that happens to have only one person in it (and usually, is a terribly designed plan in addition).

OK: down off the soap box..........

 

Tell that to the IRS, as they too have acknowledged these plans, by those names. If a sole proprietor wants to adopt a 401(k) plan, and does not plan to hire employees, are you saying you are going to have her complete 60 pages of paperwork, and she could accomplish the same thing with 2 pages?

5 hours ago, Appleby said:

It is true . Those plans are designed for that very purpose. If common law employees become eligible, then the business would have to amend the plan to a regular 401(k) plan.

Just to make sure I'm clear, because I'm not familiar with this kind of document setup: it sounds like you're saying that the eligibility rules in the documents you're talking about are set up to exclude anybody who isn't an owner or an owner's spouse.

If that's the case... what's the advantage to doing it that way? Aren't you just trading an improper exclusion failure for a coverage failure if the new employee is an NHCE? At least with a 'generic' document you don't also have to worry about retroactively amending to remove that exclusion.

13 minutes ago, duckthing said:

Just to make sure I'm clear, because I'm not familiar with this kind of document setup: it sounds like you're saying that the eligibility rules in the documents you're talking about are set up to exclude anybody who isn't an owner or an owner's spouse.

If that's the case... what's the advantage to doing it that way? Aren't you just trading an improper exclusion failure for a coverage failure if the new employee is an NHCE? At least with a 'generic' document you don't also have to worry about retroactively amending to remove that exclusion.

That is one of the many issues yes.  

1 hour ago, duckthing said:

7 hours ago, Appleby said:

It is true . Those plans are designed for that very purpose. If common law employees become eligible, then the business would have to amend the plan to a regular 401(k) plan.

Just to make sure I'm clear, because I'm not familiar with this kind of document setup: it sounds like you're saying that the eligibility rules in the documents you're talking about are set up to exclude anybody who isn't an owner or an owner's spouse.

If that's the case... what's the advantage to doing it that way? Aren't you just trading an improper exclusion failure for a coverage failure if the new employee is an NHCE? At least with a 'generic' document you don't also have to worry about retroactively amending to remove that exclusion.

Actually I don't believe the first statement is true.  I don't work with these plans (although I have a few plans that only cover an owner(s)) but my understanding is that they just have ultra-simple adoption agreements.  I just looked at a T.Rowe Price doc and it has no special exclusions; anyone who is employed and meets eligibility would enter.  At that point you simply have a plan with a marketing name "Solo" or "Uni" or whatever but it would cover others than just the owner.  The owner might want to amend the plan (although it might be too late for certain purposes) but s/he wouldn't have to.

Below is what the IRS says on their One-Participant 401(k) Plans page (I'd say they recognize the terminology but do not bless it, and for me the important text is "These plans have the same rules and requirements as any other 401(k) plan."  Also note it says "It's a traditional 401(k) plan covering a business owner with no employees..."  (my emphasis - it does not say "...covering a business owner and excluding any other employees.")

A one-participant 401(k) plan is sometimes called a:

• Solo 401(k)
• Solo-k 
• Uni-k
• One-participant k

The one-participant 401(k) plan isn't a new type of 401(k) plan. It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.

On 12/18/2018 at 6:50 AM, Appleby said:

It is true . Those plans are designed for that very purpose. If common law employees become eligible, then the business would have to amend the plan to a regular 401(k) plan.

I'm sorry, but that is just nonsense.  Go look at, for example, the Fidelity version of the plan.  It clearly has no limit on eligibility with regard to only the owner.  If a rank in file is hired and meets the eligibility requirements (which usually are immediate!), then he's in the plan whether the owner knows it or not.  The plan will work without amendment; it's just a terrible design.

On 12/18/2018 at 6:54 AM, Appleby said:

You have a case where someone who do not understand the rules sold a product to your client, for which your client was not eligible. That does not mean that the product is nonexistent. A Roth IRA would still be a a Roth IRA, even if it is sold to someone who had too much income to be eligible for it.

The "product" is not a real plan.  It is simply a hobbled adoption agreement for a real plan.  It appears you really are not aware of how these are set up.

On 12/18/2018 at 6:56 AM, Appleby said:

Tell that to the IRS, as they too have acknowledged these plans, by those names. If a sole proprietor wants to adopt a 401(k) plan, and does not plan to hire employees, are you saying you are going to have her complete 60 pages of paperwork, and she could accomplish the same thing with 2 pages?

You also do not know how most admin firms set up plans. No employer has to "complete 60 pages of paperwork" for a plan.  And yes, we use the same volume submitter plan documents for a one man plan as for a 100 or 1000 man plan!

What we do is what is right for the client; a "solo 401(k)" is a crippled document which a professional firm would never use.

19 hours ago, duckthing said:

Just to make sure I'm clear, because I'm not familiar with this kind of document setup: it sounds like you're saying that the eligibility rules in the documents you're talking about are set up to exclude anybody who isn't an owner or an owner's spouse.

If that's the case... what's the advantage to doing it that way? Aren't you just trading an improper exclusion failure for a coverage failure if the new employee is an NHCE? At least with a 'generic' document you don't also have to worry about retroactively amending to remove that exclusion.

Yes, in fact, the plans aren't set up with language that excludes anybody who isn't an owner.  Just check any one of them on line.  For example, Fidelity: 

https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/retirement-plan-trust-agreement-basic-plan-doc.pdf

18 hours ago, Bird said:

Actually I don't believe the first statement is true.  I don't work with these plans (although I have a few plans that only cover an owner(s)) but my understanding is that they just have ultra-simple adoption agreements.  I just looked at a T.Rowe Price doc and it has no special exclusions; anyone who is employed and meets eligibility would enter.  At that point you simply have a plan with a marketing name "Solo" or "Uni" or whatever but it would cover others than just the owner.  The owner might want to amend the plan (although it might be too late for certain purposes) but s/he wouldn't have to.

Below is what the IRS says on their One-Participant 401(k) Plans page (I'd say they recognize the terminology but do not bless it, and for me the important text is "These plans have the same rules and requirements as any other 401(k) plan."  Also note it says "It's a traditional 401(k) plan covering a business owner with no employees..."  (my emphasis - it does not say "...covering a business owner and excluding any other employees.")

A one-participant 401(k) plan is sometimes called a:

• Solo 401(k)
• Solo-k 
• Uni-k
• One-participant k

The one-participant 401(k) plan isn't a new type of 401(k) plan. It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.

EXACTLY!

The first and last sentences of the quoted paragraph are really the operative statements. The second sentence is not descriptive enough.

"The one-participant 401(k) plan isn't a new type of 401(k) plan. It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan."

As with any other 401k plan, no employees means no eligible employees. The one-participant plan document and adoption agreement of T. Rowe Price and Fidelity as well as many others (TPA or not) with the exception of Vanguard, allow the election of standard 401k age and service requirements. This means a small business selecting the correct adoption agreement eligibility options, can hire  employees < age 21 or part-time employees who work < 1000 hours/year (including their children) and still maintain a one-participant 401k plan.

On 12/18/2018 at 2:17 PM, Bird said:

Actually I don't believe the first statement is true.  I don't work with these plans (although I have a few plans that only cover an owner(s)) but my understanding is that they just have ultra-simple adoption agreements.  I just looked at a T.Rowe Price doc and it has no special exclusions; anyone who is employed and meets eligibility would enter.  At that point you simply have a plan with a marketing name "Solo" or "Uni" or whatever but it would cover others than just the owner.  The owner might want to amend the plan (although it might be too late for certain purposes) but s/he wouldn't have to.

Below is what the IRS says on their One-Participant 401(k) Plans page (I'd say they recognize the terminology but do not bless it, and for me the important text is "These plans have the same rules and requirements as any other 401(k) plan."  Also note it says "It's a traditional 401(k) plan covering a business owner with no employees..."  (my emphasis - it does not say "...covering a business owner and excluding any other employees.")

A one-participant 401(k) plan is sometimes called a:

• Solo 401(k)
• Solo-k 
• Uni-k
• One-participant k

The one-participant 401(k) plan isn't a new type of 401(k) plan. It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.

Hi Bird,

Thank you for confirming that there is such a thing as a Solo(k), which is the crux of the debate.  I agree with the general sentiments of your comments, from a purely regulatory perspective. However, we should also consider the intent of the providers.  See, for example, the T. Rose Price instructions, which state in part "

12 hours ago, Appleby said:

Thank you for confirming that there is such a thing as a Solo(k), which is the crux of the debate.  I agree with the general sentiments of your comments, from a purely regulatory perspective. However, we should also consider the intent of the providers.  See, for example, the T. Rose Price instructions, which state in part "

I'm not sure I confirmed that, at least as something other than a marketing term.  The conversation kind of bores me but I thought it was worthwhile to clarify for anyone following it.  Anyone who isn't intimately familiar with qualified plans should understand that installing one of these plans can backfire big time if you don't know what you are doing, which applies to most of the people using or selling them.  As a for instance, I can see a sponsor or broker checking a box for immediate eligibility ("of course - I want to be in this plan immediately") and not understanding that the second they hire someone to work even on a part time basis, not only do they have to make contributions for that person, but now have to file a 5500.  The plan itself is a valid document and does not have to be rewritten, but other consequences are more severe.

16 hours ago, Appleby said:

Hi Bird,

Thank you for confirming that there is such a thing as a Solo(k), which is the crux of the debate.  I agree with the general sentiments of your comments, from a purely regulatory perspective. However, we should also consider the intent of the providers.  See, for example, the T. Rose Price instructions, which state in part "

 

Appleby, if you called an elephant a horse, does that make it a horse?

Bird did not confirm there is such a thing as a solo k, but I know you are looking to justify your comments.  His material specifically matched what we have said; it is simply a marketing term, it is not a REAL plan.  It is not an horse just because you call it a horse!

On 12/20/2018 at 10:32 AM, Bird said:

I'm not sure I confirmed that, at least as something other than a marketing term.  The conversation kind of bores me but I thought it was worthwhile to clarify for anyone following it.  Anyone who isn't intimately familiar with qualified plans should understand that installing one of these plans can backfire big time if you don't know what you are doing, which applies to most of the people using or selling them.  As a for instance, I can see a sponsor or broker checking a box for immediate eligibility ("of course - I want to be in this plan immediately") and not understanding that the second they hire someone to work even on a part time basis, not only do they have to make contributions for that person, but now have to file a 5500.  The plan itself is a valid document and does not have to be rewritten, but other consequences are more severe.

Good point. Well taken.