Solo 401k hires employee, when must plan convert to regular 401K
When must a solo 401k which hired a new employee this year have to convert the plan from a solo to a regular 401k plan.
When must a solo 401k which hired a new employee this year have to convert the plan from a solo to a regular 401k plan.
Permalink Submitted by Alan - IRA critic on Fri, 2015-10-23 02:51
Some plan agreements may automatically morph into a standard K plan with the usual non discrimination requirements when a non spouse employee is hired. For plans that do not, it is generally recommended to require a 1 year eligibility period to participate and that will provide lead time to replace the solo K with a standard plan before employee meets the 1 year requirement.
Permalink Submitted by Carol Novak on Thu, 2018-02-01 21:39
A client has a solo 401K for himself and his wife. They hired an employee Fall of 2017 without realizing she would become eligible for the plan immediately (no eligibility requirements selected – never supposed to have an employee and they wanted to maximize contributions for themselves as soon as the plan was established). Employee should have been given the opportunity to defer for the balance of 2017. There is no Plan Administrator. Plan can be amended to a traditional K plan if an employee is hired. So, following IRS guidance via the web, this looks like an insignficant error that can be self corrected by the employer making a QNEC equal to 50% of the average deferral percentage in the plan (he and his wife) times the enployee’s compensation for the period and adjusted for earnings. I am assuming the steps to correct would be:Amend the existing planOpen an account for the new employeeMake the corrective QNECFile a 5500 for 2017 now that the plan is no longer exempt from filing a 5500.Does this sound accurate? Employer does not want to continue the 401K given the on-going administrative expenses. He prefers to close the 401K after amending and correcting. Can this be closed immediately after the corrections are made? It doesn’t look like a Simple IRA can be established in the same year that a 401K is closed. Just looking for options….. Any guidance is apprecaited!
Permalink Submitted by Carol Novak on Thu, 2018-02-01 21:39
A client has a solo 401K for himself and his wife. They hired an employee Fall of 2017 without realizing she would become eligible for the plan immediately (no eligibility requirements selected – never supposed to have an employee and they wanted to maximize contributions for themselves as soon as the plan was established). Employee should have been given the opportunity to defer for the balance of 2017. There is no Plan Administrator. Plan can be amended to a traditional K plan if an employee is hired. So, following IRS guidance via the web, this looks like an insignficant error that can be self corrected by the employer making a QNEC equal to 50% of the average deferral percentage in the plan (he and his wife) times the enployee’s compensation for the period and adjusted for earnings. I am assuming the steps to correct would be:Amend the existing planOpen an account for the new employeeMake the corrective QNECFile a 5500 for 2017 now that the plan is no longer exempt from filing a 5500.Does this sound accurate? Employer does not want to continue the 401K given the on-going administrative expenses. He prefers to close the 401K after amending and correcting. Can this be closed immediately after the corrections are made? It doesn’t look like a Simple IRA can be established in the same year that a 401K is closed. Just looking for options….. Any guidance is apprecaited!