Solo 401(k) and DB Plan

A Solo 401(k) sponsor wants to add a Cash Balance Plan.  Is this OK, or is it advisable (or necessary) for the sponsor amend the Solo 401(k) into a regular 401(k) to have any overlapping provisions coordinated?

Geez, just had this discussion - a "solo 401(k)" is a regular plan, just intended for one participant.  It wouldn't surprise me if the 401(k) had something buried in it which says you can't sponsor another plan.  Even if not, odds are pretty good that there is something crippling in there that ought to be changed.  The cash balance TPA and/or actuary should really be running both plans, or at least coordinating very carefully.

I think solo-K products/documents state there can't be any non-owner employees but shouldn't limit the ability to adopt a CBP. Certainly check if it's specifically a "solo" product, rather than a normal pre-approved plan simply adopted for a sole proprietor.

Also, this late in the year, if the profit sharing max has already been funded (above and beyond salary deferrals, which many like to do as early as possible), your CB deduction may be severely limited by the combined plan deduction limits. The PS is more than 6% of eligible compensation then your total DB/DC deduction will be limited to 31% of eligible compensation.

Bird, Thanks for the response.  I have only the PS adoption agreement so far, which only says that if there are multiple plans then a determination letter should be requested for reliance on 415 and 416 but those are not issues for a 1 life owner employee plan IMO.   To your point, perhaps the prototype might have something else.   But I figured others must have addressed this issue.

But my real question is whether the solo k must changed to a regular k, and if so by when.

CuseFan, thanks for your comments as well.  The deduction limit is certainly critical but it's not a document issue I don't think. 

21 minutes ago, AndyH said:

But my real question is whether the solo k must changed to a regular k, and if so by when.

As @Bird pointed out earlier, the "solo k" IS a regular 401(k) plan.  Unfortunately, those who market 401(k) plans as "solo" or "uni" or whatever (k), often use a plan document that has been severely limited because the promoter of the "solo" is not able or unwilling to deal with plans when there are people other than owners, spouses, or partners involved. 

Whether your particular 401(k) plan document must be amended depends on whether the document provider designed it in such a way that an amendment is needed. 

If the question is "can you have a one-participant plan and a cash balance plan"? then the answer is yes.  But do you really need a CB plan?  Unless you have a partner only plan you only have to deal with Owner and maybe spouse, a regular DB plan should be all you need and is probably easier...

Interesting, thank you.

4 hours ago, AndyH said:

A Solo 401(k) sponsor wants to add a Cash Balance Plan.  Is this OK, or is it advisable (or necessary) for the sponsor amend the Solo 401(k) into a regular 401(k) to have any overlapping provisions coordinated?

As noted, there was just a long thread on this issue.  YOu need to go read it:

https://benefitslink.com/boards/index.php?/topic/63512-unik-ower-dies-can-we-make-a-post-death-profit-sharing-contribution/&tab=comments#comment-288769

There is no such dichotomy as a "solo 401(k)" and a "regular 401(k)".  Just to state the obvious, what are marketed by mostly incompetent firms are severely crippled 401(k) documents that are every rich a "regular" 401(k) plan.   I will almost guarantee that a crippled 401(k) document and a defined benefit plan document will not be acceptable.  More than likely, the 401(k) document has no language to deal with the existence of a DB plan with regard to things like, say, top heavy.  

Also, there is no earthly reason for a one man DB plan to be in the form of a cash balance plan. A one man cash balance plan and a "solo" 401(k) plan deserve each other!  Strong opinion to follow. :-)

Thanks for the link Larry.  That is quite a rant!  I also had thought EGTRRA had bred a new animal but it's apparently just a product.

49 minutes ago, AndyH said:

Thanks for the link Larry.  That is quite a rant!  I also had thought EGTRRA had bred a new animal but it's apparently just a product.

Not even a product; just marketing BS.

I have to disagree about the one-life cash balance plans. It is still easier for the average business owner to understand accrued benefits when said benefits are expressed as pay credits and interest credits. And since they're always interested in eventually taking a lump sum benefit, it makes it simple when designing the plan to demonstrate how those pay credits and interest credits add up to their eventual lump sum.

1 minute ago, C. B. Zeller said:

I have to disagree about the one-life cash balance plans. It is still easier for the average business owner to understand accrued benefits when said benefits are expressed as pay credits and interest credits. And since they're always interested in eventually taking a lump sum benefit, it makes it simple when designing the plan to demonstrate how those pay credits and interest credits add up to their eventual lump sum.

In a one person DB  plan, whatever is in the fund is their benefit. Pay credits and interest credits are silly; "how much is in my account" is actually answerable even though it really doesn't normally apply to a DB  plan. 

In designing the plan, we simply want to know their budget, we design the plan to fit that parameter, and they know every day how much they are going to get paid so  long as we keep the assets no more than the maximum payable (which we are very accomplished at accomplishing!).  They don't have to understand accrued benefits or our actuarial black box; they see their plan statement from the investment company every month and that's their benefit.  They know how much money we are targeting for retirement, but that can change every year as their business success waxes and wanes. Our job is to get each year's contribution where they want from the standpoint of their pocketbook.  And at that we are very successful and don't need the restrictions of a cash balance plan to do it.

22 hours ago, C. B. Zeller said:

I have to disagree about the one-life cash balance plans. It is still easier for the average business owner to understand accrued benefits when said benefits are expressed as pay credits and interest credits. And since they're always interested in eventually taking a lump sum benefit, it makes it simple when designing the plan to demonstrate how those pay credits and interest credits add up to their eventual lump sum.

Agree.  Plus there is much less interest rate volatility if the account balances are funded.

On 12/21/2018 at 11:54 AM, AndyH said:

Agree.  Plus there is much less interest rate volatility if the account balances are funded.

I think I disagree if I understand what you are saying.  In fact, it is exactly the opposite.  You and I are each 3 years into a plan.  You have funded to the hypothetical account balances.  I have funded to the 404 limit (generally 33% higher than what you have funded).  Another 2008 comes along and everybody's investments suffer a 33% decline.  You have to fund a &*%$-load to fund to the hypothetical account balance.  My plan's use of the cushion in the past leaves me adequately funded. Since, by definition, the benefits you define have to be greater than those I use, given the same contributions for the first three years, interest rate volatility is much higher in your design than mine.

I have found that there are sometimes good reasons for small plans to adopt a cash balance plan. Keeping track of who is supposed to get what from a plan when there are multiple owners, for example.

But for the one man plan?  Rarely is a cash balance plan the best fit.

Come to Mary Ann  Rocco & my session at the LA Conference next month for more discussion of this stuff.

I agree with Larry and Mike whole-heartedly. I have a one-person DB plan (as well as a one-person profit-sharing 401(k) plan) and have worked with my actuary over the past 12 years to be funding it reasonably, but not overly so.

The ability to use the extra funding cushion from expected future salary increases is a good reason to use a traditional DB design. Hopefully we will get 404(o) regs one day that will provide some parity for cash balance plans.

Any chance your session will be available on a webcast at some point in the future? LA is sadly not on the agenda this year.

They have never been made generally available in the past.  You'd have to check with ASPPA.

On 12/22/2018 at 5:56 PM, Mike Preston said:

I think I disagree if I understand what you are saying.  In fact, it is exactly the opposite.  You and I are each 3 years into a plan.  You have funded to the hypothetical account balances.  I have funded to the 404 limit (generally 33% higher than what you have funded).  Another 2008 comes along and everybody's investments suffer a 33% decline.  You have to fund a &*%$-load to fund to the hypothetical account balance.  My plan's use of the cushion in the past leaves me adequately funded. Since, by definition, the benefits you define have to be greater than those I use, given the same contributions for the first three years, interest rate volatility is much higher in your design than mine.

I have found that there are sometimes good reasons for small plans to adopt a cash balance plan. Keeping track of who is supposed to get what from a plan when there are multiple owners, for example.

But for the one man plan?  Rarely is a cash balance plan the best fit.

Come to Mary Ann  Rocco & my session at the LA Conference next month for more discussion of this stuff.

 

Well said, Obi-Wan!

On ‎12‎/‎22‎/‎2018 at 5:56 PM, Mike Preston said:

I think I disagree if I understand what you are saying.  In fact, it is exactly the opposite.  You and I are each 3 years into a plan.  You have funded to the hypothetical account balances.  I have funded to the 404 limit (generally 33% higher than what you have funded).  Another 2008 comes along and everybody's investments suffer a 33% decline.  You have to fund a &*%$-load to fund to the hypothetical account balance.  My plan's use of the cushion in the past leaves me adequately funded. Since, by definition, the benefits you define have to be greater than those I use, given the same contributions for the first three years, interest rate volatility is much higher in your design than mine.

I have found that there are sometimes good reasons for small plans to adopt a cash balance plan. Keeping track of who is supposed to get what from a plan when there are multiple owners, for example.

But for the one man plan?  Rarely is a cash balance plan the best fit.

Come to Mary Ann  Rocco & my session at the LA Conference next month for more discussion of this stuff.

 

Mike, what prevents a one life CB sponsor from over-funding the plan using the (non-salary scale)cushion just like a traditional formula?   When I said account balances I meant that as a minimum.  And the salary scale is irrelevant if the sponsor is at the 401(a)(17) limit, or a salary scale is not appropriate (e.g. a self employed person)

I'd love to go to your session but the left coast isn't in the cards at this time.  Maybe someday.  Or if you bring it to Chicago next year.

Nothing prevents it!  But doing so eliminates one of the reasons that CB-or-die diehards use to justify their stance: the client likes the account balances to equal the assets.

can an employer who has a solo 401(k) adopt a regular 401(k) plan and defined benefit plan for 2018 and then merge the solo 401(k) into the regular 401(k) plan sometime in 2019?

the question is, can an employer have two separate 401(k) plans covering the same employee? the only employee of the company is the owner.

the regular 401(k) plan and defined benefit plan were adopted earlier this year and it was recently discovered that the employer also has a solo 401(k) plan thats been in existence for the last 10 years.

It isn't an issue.  You can have 10 of 'em! You probably put 001 and 002 into your documents when it should have been 003 and 002.  No big deal, those are just note items anyway.

Mike, thank you very much for your expertise and guidance.