Extra plan for second business?

Good morning to all,

I have been asked to post the following question from a CPA referral source:

"Facts:

1. Individual owns 100% of an S corporation.  Only employees are husband and wife.  They have a solo 401K plan.  They both maxed their elective deferrals and the employer contributed max profit sharing.
2. Husband also owns another business with no employees that is taxed as a sole proprietorship  Sole proprietorship is profitable in 2018.  Can they also do a SEP for the sole proprietorship?"

I have no further information than what is shown in the inquiry.

Thank you in advance to anyone who has had to address this before and knows what is permissible.

Nope. the two businesses are a controlled group, and as such, the owner is already maxed out. Now, I'm assuming when you say "contributed the max profit sharing" that you mean they maxed out on the full 415 limit dollar amount. If not, there may be room for a contribution - but you can't use an IRS model SEP, you'd have to use a prototype SEP that allows it.

1 hour ago, Belgarath said:

Nope. the two businesses are a controlled group, and as such, the owner is already maxed out. Now, I'm assuming when you say "contributed the max profit sharing" that you mean they maxed out on the full 415 limit dollar amount. If not, there may be room for a contribution - but you can't use an IRS model SEP, you'd have to use a prototype SEP that allows it.

Agreed. And if there is some room because they are not at 415 limit, just have the second business also adopt the existing plan and you can use the comp from both if you need it to get to the 415 max.

PS: There ain't no such thing as a "solo 401(k)".  It's just a 401(k).

Thank you very much, Belgrath and Larry!

They should think about setting a defined benefit plan for 2019.

Good point Calavera!  Nobody has said just how much money this extra sole proprietorship generates.  It might be enough to make a DB worthwhile.

Responding to Larry, there are differences between a "solo" 401(k) and a 401(k):  Assets in the former can be reached in bankruptcy.  Also, if memory serves, there is no 5500 reporting requirement for the "solo" 401(k).  If the owners decide to set up a different plan in future years, they'd be well-advised to transfer the solo to an IRA.

3 minutes ago, Planophyte said:

Responding to Larry, there are differences between a "solo" 401(k) and a 401(k):  Assets in the former can be reached in bankruptcy.

Sorry; this is a perfect example of the confusion and flat-out wrong-ness of the term.  You are describing a 401(k) plan that happens to only have an owner(s) (and spouse) in it.  It may have been sold as a "solo" but it does not preclude participation of others, and the minute you have another participant, reporting requirements change as do other things, such as bankruptcy protection.  But it's the same plan.

9 minutes ago, Planophyte said:

Also, if memory serves, there is no 5500 reporting requirement for the "solo" 401(k).

Again, a plan may have been sold as a "solo" but it is a regular plan and if others enter there are regular reporting requirements...and a not minor point, a "one-man" plan (which is a term the IRS has used although it could cover multiple owners and/or spouses) does indeed have reporting requirements, if/when assets are over $250K and in the year of termination, regardless of assets.

12 minutes ago, Planophyte said:

If the owners decide to set up a different plan in future years, they'd be well-advised to transfer the solo to an IRA.

Why?

@Calavera:  We did contact the CPA and ask if a DB might be feasible and he said the extra income from the sole prop is too erratic right now to justify setting up a DB.

46 minutes ago, ldr said:

We did contact the CPA and ask if a DB might be feasible and he said the extra income from the sole prop is too erratic right now to justify setting up a DB.

Take note: there might be advantages to creating a DB plan now, using a very low benefit level, and amending (ie, increasing) the benefit later when additional income is available.  Ask your actuary.

@david rigby       That's good advice if the CPA foresees that there will be income of some sort each year and presumably increasing income.  However, if this was just a fluke, a one-shot wonder year, and he is in doubt that it will happen again next year, then it's not a great idea.  I don't know, actually.  The little bit that I wrote here is all the information I have.  But we will ask, and thanks for the idea!

23 hours ago, Planophyte said:

Responding to Larry, there are differences between a "solo" 401(k) and a 401(k):  Assets in the former can be reached in bankruptcy.  Also, if memory serves, there is no 5500 reporting requirement for the "solo" 401(k).  If the owners decide to set up a different plan in future years, they'd be well-advised to transfer the solo to an IRA.

You are just so wrong; I'm glad I don't have to respond to the technical issues (see Bird's response).  You got each and every point you made in that response wrong.  I don't know who you are or what you do, but I do hope you are not working directly with clients without someone who knows what they are doing looking over your shoulder very closely.