Things that make you go Hmmm...

So my mind starting twisting around in circles over this question.  A solo 401(k) plan is exempt from ERISA and therefore presumably exempt from the new "Long-Term Part Time" employee rules.   Or is it?  Because if it is not exempt from those rules, there are an awful lot of solo 401k plans that will no longer be solo 401k plans.  And that would really make me go Hmmm....

Anyone know what the story is?

I'll play along

Its (mostly) exempt from ERISA because there are no employees to protect.  It would be odd to then exempt it from the rules that dictate when employees must become eligible to participate.  

Unless I have missed something, the LTPT rules will apply, and will turn many of them into former solo's. 

I think you will really have to go Hmmm...

The changes are to the Code. As far as I know, the SECURE Act didn't make any changes/exceptions to the ERISA reporting rules, etc., purely with regard to employees covered by the 'Long-term part time" rules. So not only would you have some "Solo" plans that fall out of solo status, but you might end up with more plans requiring an audit. Of course, if the DOL ever gets it together and changes the participant counting rules on 401k plans to not count as a participant someone who is merely eligible but doesn't defer or receive contributions, this might more than offset the participant count increase for the LTPT employees.

Must....grind....out...few...more....years...before....retirement!!!

Must....grind....out...few...more....years decades...before....retirement!!! ?

Hmmm...  That really stinks.  i mean really I guess most of the solos are just husband and wife at most. It will just be one more thing to watch out for I guess.

If (when there is a long-term part-time employee who must be admitted for elective deferrals) a business owner prefers to maintain a non-ERISA owners-only plan, might it make sense to start a second (ERISA-governed) plan for employees?

Are the "part-timers" being paid on a W-2 or a 1099? If it's a 1099, then there isn't an issue.

Hi Peter - maybe someone else could see the benefit in that, but off the top of my head, I can't see how having two plans is better than one in this situation. Maybe it is better and I'm just having a brain cramp...

15 minutes ago, Belgarath said:

Hi Peter - maybe someone else could see the benefit in that, but off the top of my head, I can't see how having two plans is better than one in this situation. Maybe it is better and I'm just having a brain cramp...

Well for one the SPD and SAR wouldn't be required for the owners' plan. If the company is just husband & wife owners plus 1 long term part time employee, they might not want to give the employee a SAR that says "we contributed $120,000 to the plan this year" alongside a participant statement showing $0 of that was for them.

1 hour ago, Alonzo Church said:

Are the "part-timers" being paid on a W-2 or a 1099? If it's a 1099, then there isn't an issue.

Anyone paid on a 1099 is by definition not an employee and therefore not eligible for any qualified retirement plan, since such a plan must be maintained for the exclusive benefit of  employees and their beneficiaries.

Well because we don't have to worry about top-heavy minimums, and nondiscrimination, maybe it's not to so bad after all . You just have to do a 5500 I guess.  I suppose our fees have to go up a lot now that all of that is required.  But I guess it doesn;t prevent the owner from maxing out with zero contributions for any employees.

And they need a fidelity bond.

I too don't see the need for two separate plans, especially taking into account all of the extra fees.

Only if they pass the true independent contractor rules, just because 1099 does not mean it is.

16 minutes ago, Jakyasar said:

Only if they pass the true independent contractor rules, just because 1099 does not mean it is.

Most 401(k) plans nowadays will contain the Microsoft language, which excludes (as a class) employees who are treated as independent contractors.

I don't think we know yet how class exclusions will interact with the long-term part-time eligibility rule. If I had to take a guess I would expect that you would be permitted to exclude them as long as the classification is reasonable and not related to the number of hours they work.

1 hour ago, C. B. Zeller said:

I don't think we know yet how class exclusions will interact with the long-term part-time eligibility rule.

Don't we? There is nothing in the statutory language that would support making them "untouchable" by an otherwise proper exclusion.  

3 minutes ago, RatherBeGolfing said:

Don't we? There is nothing in the statutory language that would support making them "untouchable" by an otherwise proper exclusion.  

Barring any further regulatory action, I agree.

However, a typical class exclusion has the guardrails of the coverage test to prevent it from being discriminatory. With LTPT employees this doesn't apply. I wouldn't be surprised to see something that prevents a class exclusion being used to get around the LTPT rules.

It's also possible I am overthinking this.

52 minutes ago, C. B. Zeller said:

However, a typical class exclusion has the guardrails of the coverage test to prevent it from being discriminatory. With LTPT employees this doesn't apply.

Good point.

I often suggest to a partner or other business owner not having an owners-only plan, and deliberately including at least one employee beyond owners.  That way, the plan will be ERISA-governed, which, among other consequences, gets stronger protection against creditors.

But a factor pointing in another direction for some is that public availability of a Form 5500 report on a plan’s assets might indirectly reveal a business owner’s stake.  For example, if a report shows only two participants, a reader might deduce that the business has only one owner and might infer that about 99% of the plan’s assets is the owner’s account.

55 minutes ago, Peter Gulia said:

 

But a factor pointing in another direction for some is that public availability of a Form 5500 report on a plan’s assets might indirectly reveal a business owner’s stake.  For example, if a report shows only two participants, a reader might deduce that the business has only one owner and might infer that about 99% of the plan’s assets is the owner’s account.

I had a client several years ago accusing me (my firm) of putting his personal info out on the web when his 5500 was posted online.  He had one other employee.  And him and the wife did indeed have about 99% of the assets.  One of his colleagues found it online and must have brought it up to him.

I had to explain that we did nothing wrong, and were just following the law.

He wasn't very happy.

How does two plans help if the EE's get nothing in the second plan?  They have to be tested together as they can't pass coverage by themselves.

For long-term part-time employees who become eligible because of § 401(k)(2)(D)(ii), a plan need not provide nonelective or matching contributions.  § 401(k)(15)(B)(i)(I).

About long-term part-time employees who become eligible because of § 401(k)(2)(D)(ii), an employer may choose coverage and nondiscrimination relief similar to tax law for a plan that covers otherwise excludable employees.  § 401(k)(15)(B)(i)(II).  This might permit excluding long-term part-time employees from top-heavy vesting and contributions.  § 401(k)(15)(B)(ii).  But the special nondiscrimination relief ends for an employee who becomes a full-time employee.  § 401(k)(15)(B)(iv).

Internal Revenue Code § 401(k)(15)

(B)  Nondiscrimination and top-heavy rules not to apply

(i)    Nondiscrimination rules

In the case of employees who are eligible to participate in the arrangement solely by reason of paragraph (2)(D)(ii)-

(I)   notwithstanding subsection (a)(4), an employer shall not be required to make nonelective or matching contributions on behalf of such employees even if such contributions are made on behalf of other employees eligible to participate in the arrangement, and

(II)  an employer may elect to exclude such employees from the application of subsection (a)(4), paragraphs (3), (12), and (13), subsection (m)(2), and section 410(b).

(ii)   Top-heavy rules

An employer may elect to exclude all employees who are eligible to participate in a plan maintained by the employer solely by reason of paragraph (2)(D)(ii) from the application of the vesting and benefit requirements under subsections (b) and (c) of section 416.

(iii)  Vesting

For purposes of determining whether an employee described in clause (i) has a nonforfeitable right to employer contributions (other than contributions described in paragraph (3)(D)(i)) under the arrangement, each 12-month period for which the employee has at least 500 hours of service shall be treated as a year of service, and section 411(a)(6) shall be applied by substituting "at least 500 hours of service" for "more than 500 hours of service" in subparagraph (A) thereof.

(iv)  Employees who become full-time employees

This subparagraph (other than clause (iii)) shall cease to apply to any employee as of the first plan year beginning after the plan year in which the employee meets the requirements of section 410(a)(1)(A)(ii) without regard to paragraph (2)(D)(ii).

A lot of good points!

And answering the premise of my initial question - this is obviously an IRS rule and solo 401ks clearly affected by it.  This will be fun. 

But all of this in my opinion pales in comparison to those ill thought out vesting rules.  How one could hope to comply with those rule (independent of a TPA/RK with several years of solid data on ALL employees) is completely beyond me.  But that would have to be a different thread altogether.  Pray that someone figures out how stupid that requirement is and repeals that section.  

About § 401(k)(15)(B)(iii), as added by SECURE § 112(a)(2):

Congress might not have considered that their Act sometimes sets up an incentive for an employer to design work patterns so a long-term part-time employee never is credited with enough service to become eligible for any nonelective or matching contribution.

For example, an employer might limit a worker to one day a week for no more than 49 weeks in any 12-month period.

How few breaks in service a participant has (and so how much vesting service a participant has) might not meaningfully affect the employer’s financial position if the participant’s account has no subaccount attributable to any nonelective or matching contribution.