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Where do I make my contributions?
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Here are some answers to frequently asked questions about our Solo & Company 401k plans: Click here for more information about ROTH 401k contributions. To search this page, press CTRL-F.
Q: Who offers and maintains this plan?
A: These Solo 401k & Company 401k plans are offered exclusively by 401kBrokers.com and administered by our wholly owned subsidiary, 401kAdministrators.com. You may invest in thousands of mutual funds, stocks, bonds and options and even take loans from your account if desired.
Q. Who is the custodian of the assets?
You can choose just about any mutual fund company, fund supermarket, brokerage house or custodian you wish to serve as the custodian of the assets in your 401k plan. Call us at 800-474-3826 if you have any questions. All checks are made payable to your chosen custodian and all rollover money goes directly to that custodian.
Q. Who is the Administrator of the 401k plan?
A: You are the "Plan Administrator" as that term is used in the Federal Law known as "ERISA". 401kAdministrators.com serves as the Third Party Administrator ("TPA") providing technical and administrative support services including qualified plan establishment, recordkeeping, reporting, compliance, loan administration and processing.
We have setup kits for our Solo & Company 401k plans at TD Ameritrade, Fidelity, Schwab and Vanguard among many others (if you do not see your favorite brokerage or custodian listed here, simply request it from us. You can also choose just about any mutual fund company, fund supermarket, brokerage house or custodian you wish, to serve as the custodian of the assets in your 401k plan. Call us at 800-474-3826).
Our Solo & Company 401k Plans are not available directly from these custodians. In order to participate in a Solo 401k, you must have established a qualified employer sponsored retirement plan before opening an investment account. That is where we come in. We set up and service your qualified employer sponsored retirement plan (401k plan) that then allows you to become eligible to participate in the various retirement investment accounts. If have one or more employees and you would like open a Company 401k plan, you may call us at 800-474-3826, or submit a plan design questionnaire or your current basic plan document, adoption agreement & summary plan description (SPD).
Q. Where do I mail the account enrollment forms?
A: 401kAdministrators, 1205 Prospect St., Suite 400, La Jolla, CA 92037.
Q: I am a Subchapter S Corporation. Can I have a Solo 401k?
A: Yes. Sole proprietors, partnerships, corporations (including S-corporations), LLC’s, and LLP’s may all establish 401k plans.
Q: What about tax returns for the 401k plan, who handles those?
A: We prepare your 401k plan tax return at no additional charge. (Although it is an IRS form, (IRS Form 5500 or Form 5500 EZ) since no tax is due, it is actually an "informational return" and it is filed with the Department of Labor). (For the 2006 plan year, an informational return is required if the plan assets exceed $100,000, or have ever exceeded $100,000 but have since fallen in value, or you have one or more eligible employees or a non-spouse participant or you have a non-standard asset in your 401k plan (such as real estate or some asset not readily capable of being valued without a price opinion or an appraisal). When the plan assets exceed $100,000, 401kAdministrators.com prepares the IRS Form 5500 or Form 5500EZ and accompanying schedules for you to sign and submit.
(If you had to prepare the Form 5500 yourself bear in mind that the IRS estimates the average time to complete and file a Form 5500 is 18 hours and 10 minutes for recordkeeping, 2 hours and 49 minutes for learning about the law or the form, 5 hours and 6 minutes preparing the form and 32 minutes for copying, assembling and sending the form. That is a total of 26 hours and 37 minutes. We prepare your plan informational return for you at no additional charge.
The Pension Protection Act of 2006 (signed into law in August of 2006) states, "The Secretary of the Treasury is directed to modify the annual return filing requirements with respect to a one-participant plan to provide that if the total value of the plan assets of such a plan as of the end of the plan year does not exceed $250,000, the plan administrator is not required to file a return. This provision relating to one-participant retirement plans is effective for plan years beginning on or after January 1, 2007.
Q: Is there an additional fee for the preparation of the Form or Form 5500EZ?
A: No
Q: Can my spouse participate in my Solo 401k plan?
A: If your spouse earns income from your business, your spouse can participate.
Q: Is there an additional fee for my spouse to participate in my Solo 401k plan?
A: There is no set up fee or termination fee, just the annual 25 basis points fee (1/4th of one percent) with no minimum fee in a Company 401k Plan. Each participant in a Solo 401k plan incurs the annual 25 basis points fee (1/4th of one percent) with a minimum annual fee of $100.
Q: What about tax or informational returns if my spouse participates in my Solo 401k?
A: Unlike the case of employing your child, (see below) when you employ only your spouse, informational returns are currently not required until the plan assets exceed $250,000. When the plan assets exceed $250,000, 401kAdministrators.com prepares the IRS Form 5500 (or Form 5500 EZ) for you to sign and submit. The Pension Protection Act of 2006 (signed into law in August of 2006) states, "The Secretary of the Treasury is directed to modify the annual return filing requirements with respect to a one-participant plan to provide that if the total value of the plan assets of such a plan as of the end of the plan year does not exceed $250,000, the plan administrator is not required to file a return. This provision relating to one-participant retirement plans is effective for plan years beginning on or after January 1, 2007.
Q: What if I have partners? Can I still have a Solo 401k plan?
A: You can have a 401kBrokers.com Solo 401k plan with just one or more business partners and no other employees. It will not be subject to top heavy testing, and the anti-discrimination rules as long as your partners are 5% or greater owners or are "highly compensated" (receives more than $100,000 in income from the business (2006) and you have no other employees other than your partners.
Q: What about the tax or informational return (Form 5500 or 5500EZ) if I have partners?
A: For purposes of filing Form 5500EZ, a one-participant retirement plan is a plan that covers: 1. Only the participant and/or spouse of a business (incorporated or unincorporated) that is wholly owned by the participant and/or the spouse; or 2. Only partners of a partnership and/or their spouses. Thus, Form 5500EZ cannot be filed by a corporation with more than one stockholder unless the only other stockholder is the spouse.
Q: What if I employ my child in my business? Can I still have a 401k plan?
A: You can still have a 401k plan, but it won't be a "Solo" 401k plan per se as you will now be subject to top heavy testing, and the anti-discrimination rules unless your child is a 5% or greater owner or is "highly compensated" (receives more than $100,000 in income from the business (2006) and you have no other employees other than your spouse.
Q: If I employ my child in my business does this affect the plan tax returns?
A: Yes. Tax returns are now required even if the plan assets are less than $100,000. (A full IRS Form 5500 is required not just a Form 5500 EZ).
Q: Can a non-profit sponsor a 401k, including a Solo 401k?
Q: Is there an online area for me to check and make changes to my account?
A: Yes, each custodian of assets has an online area for you to check and make changes to your account 24/7.
Q: Can I make my contributions online?
A: Yes
Q: Can I set up an auto debit of my contributions from a checking account?
A: Yes
Q: Is there a mandatory minimum that I must contribute?
A: No. Contribution amounts are completely flexible. If you had a good year, you can put in more, up to the limits. You can always put in less or nothing at all.
Q: How much to open an account?
A: To open an account, Ameritrade & Schwab require $250, and E*Trade & Vanguard both require at least $1,000. First time investments in fund selections must meet initial fund minimums (mostly $3,000 at Vanguard, although one Vanguard fund has a $1,000 minimum, the Star Fund). Once you have opened your account and met the initial minimum for a particular fund, you may thereafter invest less than the initial minimum.
Q: Do I have to the ability to alter the amount I contribute at any time?
A: Yes
Q: Where do I send contribution or rollover checks?
A: Do not send an initial contribution with your application to 401kAdministrators. Your new 401k plan needs to be established (by signing a 401k plan and trust adoption agreement before you may contribute to it. Accordingly, after your account is set up send contribution and rollover checks electronically or by paper check to:
Vanguard: Small Business Services Dept. 8C1, P.O. Box 1106, Valley Forge, PA 19482-1106. You should include your name and account number on the check or in a cover letter or with an invest by mail slip from your account statements. For overnight delivery, mail to The Vanguard Group, Small Business Services, 455 Devon Park Drive, Wayne, PA 19087-1815.
TD Ameritrade: Make your check payable to "TD Ameritrade FBO [your name]" and mail it to P.O. Box 2813, Omaha, NE 68103-2813 (By mail only, not electronically). Reference your account number on the check or on a cover letter.
TD Ameritrade Institutional: Make your check payable to "TD Ameritrade FBO [your name]" and mail it to TD Ameritrade Institutional, 4075 Sorrento Valley Blvd. Ste A, San Diego, CA 92121 or P.O. Box 2237, Omaha, NE 68103-3765. Call 1-800-431-3500 with any questions. (By mail only, not electronically). Reference your account number on the check or on a cover letter.
Schwab: Checks should be mailed to your nearest Schwab Operations Center, either: Charles Schwab & Co., Inc., P.O. Box 628291, Orlando, FL 32862-8291 or Charles Schwab & Co., Inc., P.O. Box 52114, Phoenix, AZ 85072-2114. (By mail or electronically).
Q. Who is the trustee and account owner?
A: You are the trustee and account owner.
Q: Do 401k Plan Trustees need to be bonded?
(A Solo 401k Plan Trustee need not be bonded). A Company 401k Plan itself (as opposed to the plan sponsor or administrator) may be a named insured under a fidelity bond from an approved surety covering plan officials and that protects the plan as described in 29 CFR Part 2580. Generally, every plan official of an employee benefit plan who ‘‘handles’’ funds or other property of such plan must be bonded.
Generally, a person shall be deemed to be ‘‘handling’’ funds or other property of a plan, so as to require bonding, whenever his or her other duties or activities with respect to given funds are such that there is a risk that such funds could be lost in the event of fraud or dishonesty on the part of such person, acting either alone or in collusion with others.
Section 412 of ERISA provides that persons that handle plan funds or other property generally must be covered by a fidelity bond in an amount no less than 10 percent of the amount of funds the person handles, and that in no case shall such bond be less than $1,000 nor is it required to be more than $500,000.
Section 412 of ERISA and DOL regulations 29 CFR 2580 provide the bonding requirements, including the definition of ‘‘handling’’ (29 CFR 2580.412-6), the permissible forms of bonds (29 CFR 2580.412-10), the amount of the bond (29 CFR 2580, subpart C), and certain exemptions such as the exemption for unfunded plans, certain banks and insurance companies (ERISA section 412), and the exemption allowing plan officials to purchase bonds from surety companies authorized by the Secretary of the Treasury as acceptable reinsurers on Federal bonds (29 CFR 2580.412-23).
Information concerning the list of approved sureties and reinsurers is available on the Internet at www.fms.treas.gov/c570.
Plans are permitted under certain conditions to purchase fiduciary liability insurance. These policies do not protect the plan from dishonest acts.
Q: Do I need to have an Company Employer Identification Number ("EIN") (also known as a Taxpayer Identification Number "TIN") to open a Solo 401k or, as a Sole Proprietor can I use my Social Security Number?
A: Vanguard and Schwab now require you to have an IRS issued Employer Identification Number ("EIN") if you will be selecting Vanguard or Schwab as the custodian of your 401kBrokers.com Solo 401k. (You may no longer allow you use your Social Security Number as the "Plan Tax Id"). If you choose Ameritrade as your custodian, you can still open a Solo 401k plan with your Social Security Number.
You can apply for a Company "EIN" or a Plan "EIN" (a tax identification number specifically for you 401k plan) online here or at https://sa.www4.irs.gov/sa_vign/newFormSS4.do. As part of our administrative service, at no additional cost to you, we will apply for a plan EIN on your behalf. (The EIN can be for the 401k plan itself or for the company).
In any event, you must have a Company EIN or a Plan EIN if a tax return must be filed for your plan as the IRS does not allow the plan tax return to be filed under a Social Security Number.
Q. Who makes the investment decisions?
A: You or your advisors make the investment decisions. 401kAdministrators.com does not make investment decisions for you.
Q: What are the total fees and costs?
A: There is no set up fee for any of our 401k plans.
For Solo 401k plans, (including spouses) our total administrative fee is a quarter point of the value of the 401k plan each year. A quarter point is also expressed as one fourth of one percent (¼ of 1%) or (¼%) or (.25%) or (25 basis points) of the 401k plan value. This is a yearly administrative fee payable to 401kAdministrators.com as the Third Party Administrator ("TPA"). (For every $10,000 in plan assets it is a $25 annual fee and for every $100,000 in plan assets it is a $250 annual fee. There is a minimum fee of $100 per participant annually).
For 2+ employee 401k plans, (meaning the owner and at least one non-spouse employee) our total administrative fee is a quarter point of the value of the 401k plan each year plus a flat fee of $1,000 per year. There is no minimum fee per participant on Company 401k Plans.
There are no additional fees. We personally answer questions, provide plan design and plan document establishment, amendments, and modifications, plan administration, tax reporting, monitoring, compliance, discrimination testing, maximum contribution calculations, arrange loans, and we prepare IRS Form 1099's and Form 5500's (plan tax returns) at no additional charge.
The annual fees are pro-rated and assessed quarterly. One fourth (1/16th of one percent (.0625%)) is charged each quarter.
There are no fees to purchase the Vanguard mutual funds. (Mutual fund managers do charge to manage all mutual funds and you will incur additional costs using the Vanguard Brokerage Services to purchase other fund families, stocks, bonds, options etc. See here: Vanguard Costs). There are fees to purchase mutual funds at Ameritrade and Schwab.
Q: How does 401kBrokers.com get paid?
A: 401kBrokers.com markets the program on behalf of our wholly owned subsidiary, 401kAdministrators.com, the Third Party Administrator on the 401k plan, who receives the annual administrative fee. We are paid from that fee.
Q: How are the administrative fees actually paid?
A: The Plan Sponsor (the self-employed person opening the Solo 401k) pays the administrative fees directly to 401k Administrators via ACH bank transfer, Visa, Mastercard, Discover or American Express or by Paypal. The administrative fees do not come from the 401k plan assets and do not reduce investment returns or contribution amounts.
Q: Are the administrative fees a deductible business expense?
Yes. The administrative fees are a deductible business expense and in certain instances may qualify for a tax credit.
Q. Does Ameritrade, Schwab or Vanguard pay 401kBrokers.com or 401kAdministrators.com?
A: None of the custodian of assets pay 401kBrokers.com or 401kAdministrators.com any commissions, compensation, fees, or money of any sort. Your 401k plan assets are never reduced to pay our fees.
Q. Are there other commissions or service fees?
A: To purchase Vanguard mutual funds, there are no service fees or brokerage charges or commissions. (Using the Vanguard Brokerage Services to purchase other fund families, stocks, bonds, options etc., will incur fees.) See here: Vanguard Costs.
401kBrokers.com does not charge anything more than the 25 basis points (1/4th of 1%) administrative fee, not even if you want a loan from your 401k ($0 setup and $0 each year the loan remains outstanding).
Q: At Vanguard, is this plan limited to only Vanguard no load index funds?
A: Not only can you purchase any of the Vanguard no load funds, (including both the Vanguard index funds and the actively managed funds), you can use Vanguard FundAccess to purchase any exchange traded stocks, foreign securities, bonds, options, mutual funds from other fund families, fixed income securities such as U.S. Treasury Securities (including zero-coupon and inflation-indexed), Corporate bonds, Municipal and U.S. Government Agency Bonds, Mortgage-backed securities and Certificates of Deposit (CDs). Many mutual funds from other fund families have no transaction charges as well. Go to Vanguard for the Vanguard FundAccess fund listing or click here for a complete list of the costs associated with using Vanguard Brokerage Services.
Q: Is my Solo 401k or Company 401k protected from my creditors?
A: Yes. On April 20th, 2005 the President signed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“Act”). The Act makes significant changes in the bankruptcy rules, including adding specific protections for retirement plans. The Act goes into effect for bankruptcy petitions filed after October 16, 2005.The new law exempts from the bankruptcy estate assets held by a qualified plan (Solo 401k or Company 401k), 403(b) plan, 457 plan or IRA (traditional, Roth, SEP and SIMPLE). The effect of the exemption is to place retirement plan assets beyond the reach of creditors during or after a bankruptcy proceeding. The exemption for retirement plan assets applies irrespective of whether the debtor elects the federal or state bankruptcy exemptions. However, the new law contains an exception for federal tax liens and limits the application of the exemption for IRAs to $1,000,000. The new law imposes no dollar limitation on the exemption for other retirement plans (Solo 401k or Company 401k). Amounts directly rolled over to another retirement plan (i.e. into a Solo 401k or Company 401k) or IRA qualify for the exemption as do amounts distributed and rolled over within the 60-day rollover period.
Q: How much can I contribute to my Solo 401k each year?
For 2005: A: The maximum employee and employer contributions combined may not exceed $42,000 in 2005 (if you are under 50) and $46,000 if you are older than 50 (or if you turn 50 in 2005).
For 2006: A: The maximum employee and employer contributions combined may not exceed $44,000 in 2006 (if you are under 50) and $49,000 if you are older than 50 (or if you turn 50 in 2006).
For 2007: A: The maximum employee and employer contributions combined may not exceed $45,000 in 2007 (if you are under 50) and $50,000 if you are older than 50 (or if you turn 50 in 2007).
Please feel free to use our calculator. When you send a check to Vanguard (or other custodian or brokerage) to contribute to your 401k plan (or you make an automatic investment), you need not declare to them whether it is an employee contribution or an employer contribution, but you must keep track yourself and let us know upon request.
Q: What is the maximum I can contribute as an employee each year?
For 2005: A: Employees under 50 can contribute up to 100% of their earnings (not to exceed $14,000) as an employee contribution to their Solo 401k plan. (Employees who are older than 50 (or who turn 50 in 2004) can contribute up to 100% of their earnings not to exceed $18,000) as an employee contribution to their 401k plan.
For 2006: A: Employees under 50 can contribute up to 100% of their earnings (not to exceed $15,000) as an employee contribution to their Solo 401k plan. (Employees who are older than 50 (or who turn 50 in the relevant tax year) can contribute up to 100% of their earnings not to exceed $20,000) as an employee contribution to their 401k plan. If you have established a separate designated "ROTH 401k" account you may divide the total employee contribution (plus the "catch up") between the ROTH 401k account and the traditional pre-tax 401k account in any percentage you choose. You may take a tax deduction for the amounts contributed to the traditional pre-tax 401k account but you may not take a tax deduction for the amounts contributed to the ROTH 401k account. You may not exceed the total of $15,000 ($20,000 if age 50 or older) between both the traditional pre-tax 401k account and the ROTH 401k account. You may not make an employer contribution or employer profit sharing or employer matching contribution to the ROTH 401k account.
For 2007: A: Employees under 50 can contribute up to 100% of their earnings (not to exceed $15,500) as an employee contribution to their Solo 401k plan. (Employees who are older than 50 (or who turn 50 in the relevant tax year) can contribute up to 100% of their earnings not to exceed $20,500) as an employee contribution to their 401k plan. If you have established a separate designated "ROTH 401k" account you may divide the total employee contribution (plus the "catch up") between the ROTH 401k account and the traditional pre-tax 401k account in any percentage you choose. You may take a tax deduction for the amounts contributed to the traditional pre-tax 401k account but you may not take a tax deduction for the amounts contributed to the ROTH 401k account. You may not exceed the total of $15,500 ($20,500 if age 50 or older) between both the traditional pre-tax 401k account and the ROTH 401k account. You may not make an employer contribution or employer profit sharing or employer matching contribution to the ROTH 401k account.
Q: What is the maximum I can contribute as an employer each year?
Incorporated employers can contribute up to 25% of their W-2 earnings as an employer contribution to their 401k plan. You may not make an employer contribution or employer profit sharing or employer matching contribution to a ROTH 401k account.
Q: How do I report to the IRS the contributions I make as an employee each year?
A: Employee contributions are totaled and inserted on line 28 of your own personal 1040 form. You may take a tax deduction for the amounts contributed to the traditional pre-tax 401k account but you may not take a tax deduction for the amounts contributed to the ROTH 401k account. Your W-2 Box 1 does not include your pre-tax elective deferrals. It is reported in W-2 Box 12 and W-2 Box 13 should be checked "Retirement Plan". For additional guidance, please see pages 7 & 9 of the IRS W-2 instructions.
Q: Since designated Roth contributions are already included as part of wages, tips & other compensation on the Form W-2, must the amount contributed as designated Roth contributions be identified on the Form W-2 as well?
Yes, contributions to a designated Roth account must also be separately reported on Form W–2, “Wage and Tax Statement,” in accordance with the W2 instructions. The Act requires separate reporting of the yearly designated Roth contributions. Designated Roth contributions to 401(k) plans will be reported using code AA in box 12.
Q: How do I report to the IRS the contributions I make as an employer each year?
A: If you are a corporation: Employer contributions are totaled and inserted on line 24 of the corporate 1120 tax return form. You may take a tax deduction for the amounts contributed to the traditional pre-tax 401k account but you may not take a tax deduction for the amounts contributed to the ROTH 401k account. If you are a sole proprietor: Contributions made by you as an employer on behalf of any other participant other than yourself or your spouse are totaled and inserted on line 19 of your Schedule C tax return form. If filing jointly with your spouse, do not put any 401k contributions made on your own behalf or on behalf of your spouse on line 19 of your Schedule C, add both together and along with your combined employee contributions, put them all as one number on line 28 of your 1040).
Enter contributions made as an employer on your own behalf (and your spouse's behalf if filing jointly) on Form 1040 line 28, not on Schedule C. You may take a tax deduction for the amounts contributed to the traditional pre-tax 401k account but you may not take a tax deduction for the amounts contributed to the ROTH 401k account.
If you are an LLC: Please review IRS publication 3402 as the tax return you file depends on your particular LLC.
A: Elective contributions (Employee salary deferral) to a 401k plan are subject to FICA withholding at the time contributions are made (up to the "taxable wage base").
In other words, where the sponsoring entity is a sole proprietor and the employer contribution is made on behalf of oneself, the employer contribution is also subject to FICA.
The 2006 "taxable wage base" of $94,200 is $4,200 higher than the 2005 amount ($90,000), and the maximum additional Social Security tax that might be collected on someone earning above the 2005 wage base is $260.40. This is the largest increase since 2002 in both dollars and in percentage, and reflects the largest increase in national average wages since 2000.
The taxes paid by employees are matched by identical amounts paid by employers into the Social Security system. Taxes for self-employed individuals use the same earnings base, but the rates are double those of employees, since the self-employed must also pay the 'employer' portion of the taxes.
This means that high-earning, self-employed individuals may owe as much as $520.80 in additional self-employment tax in 2006. However, they can recoup some of this amount through a deduction on their federal income tax. About 11.3 million workers will be affected by the higher wage base in 2006.
Q: What amounts are subject to FUTA withholding? (Federal Unemployment Tax)
A: As with FICA, elective contributions (Employee salary deferral) to a 401k plan are subject to FUTA withholding but matching contributions or profit sharing contributions (Employer contributions) are not subject to FUTA withholding. (The maximum amount of wages paid to an employee during any calendar year that may be subject to FUTA tax is $7,000 (in 2004) but this amount may be periodically adjusted through legislative amendment).
Q: As a Subchapter "S" Corporation, can I contribute 25% of the income distributed to me as profit at the end of the year (K1) or is it only 25% of my W-2 wages.
Q: As a partner in a partnership (or LLC taxed as a partnership), can I contribute 20% of the income distributed to me as profit at the end of the year (K1) as my profit sharing contribution or is it only 20% of my W-2 wages.
Q: If someone owns a one-member LLC that anticipates a net income of about $280,000 what is the best strategy for maximizing deductions when including the spouse in the plan?
A: Under an LLC taxed as a corporation, $112,000 in W-2 wages for each spouse will allow for the maximum 401k contributions in 2005. So, pay the husband approximately $112,000 on a W-2 and pay the wife approximately $112,000 on a W-2. From his W-2 income, H defers $14,000 into the plan and W also defers $14,000 into the plan (unless they are over 50 or turn 50 this year, in which case they can each defer $18,000 of their W-2 income into the plan). The remaining net income after the W-2's is approximately $56,000. From the remaining net income of $56,000 have the LLC contribute $28,000 for the husband (25% of $112,000) and $28,000 for the wife (25% of $112,000) in profit sharing, leaving no remaining net taxable income to the LLC or its member(s) to distribute under a K-1.
Q: When do I have to make my contributions by?
Employee salary deferrals have a different deadline than employer contributions and Solo 401k plans have a different deadline than Company 401k Plans.
A: For Solo 401k plans
only (defined as 401k plans with no non-owner employees and
consisting of just a business owner and/or their spouse),
you may contribute both the employee contribution (including
ROTH contributions) and the employer contribution (profit
sharing) up until the filing of your tax return.
For Sole Proprietors, including single member disregarded LLC's,
sponsoring Solo 401k plans (as defined above) and filing a
personal tax return (Form 1040 with Schedule C), the deadline
for both the employee contribution (including ROTH
contributions) and the employer contribution is therefore April
15th per I.R.C. §404(a)(6) (or later if an extension is filed).
For S-Corporations (and LLC's taxed as corporations) sponsoring
Solo 401k plans (as defined above) and filing a corporate
tax return (Form 1120 or 1120S) the deadline is therefore March
15th per I.R.C. §404(a)(6) (or later if an extension is filed).
All employee salary deferrals (including ROTH contributions) for "Company Plans" (401k plans with at least one non-owner employee or consisting of any 401k participant other than just a business owner and/or their spouse) have to be contributed to the plan as soon as they can be reasonably be segregated from the company's general assets and in any event no later than 15 business days after the end of the month in which the contributions would have been paid to the employee in cash if not withheld from wages. [DOL Regulation §2510.3-102(a)].
Generally speaking employer profit sharing contributions for both "Company Plans" and "Solo Plans" can be made up to the filing of the tax return (including extensions). See I.R.C. §404(a)(6).
Q: Can a salary deferral only be made from income after the 401k is established?
A: "Yes, or it would not be a deferral", according to Mary Anne Boyker IRS Customer Service ID3103130. However, see important news for Sole Proprietors immediately below...
Q: If you are a cash basis taxpayer when is the income deemed to have been received?
A: According to Mary Anne Boyker of the IRS in Customer Service, ID3103130, "...for Sole proprietors, because of how the income flow works, they are deemed to have received their entire income as of the last day of the year. So if the Solo 401k plan is setup in December, then they can still defer based on December 31st as being the date they earned it all..." The IRS toll free number is 877-829-5500.
Q: What does that mean?
A: It means that if you are a Sole Proprietor and you set up your 401k plan before December 31st, you can still add the maximum employee salary deferral amount ($15,500 in 2007) even if you didn't actually receive any income between the date the plan is established and December 31st...(as long as you received at least that much that year).
Since employer profit sharing contributions can be made after year end based on the entire year's income (even if the plan was set up, say, in late December)...sole proprietors can fully utilize both components of contribution as long as they set their plan up before the last day of the year..
Q: If a Sole Proprietor is considered to not receive their income until the end of the year, can they still make employee salary deferral contributions before year end?
A: Yes, a self-employed sole proprietor may defer (contribute to the 401k plan) on cash advance payments made during the plan year and before earned income is finally determined. The cash advance payments must be based on the value of the self-employed individual's services prior to the date of payment and must not exceed a reasonable estimate of earned income for the self-employed individual's taxable year. In addition the self-employed individual must have made a cash or deferred election before amounts are withheld from the cash advance payments. Treas. Reg. Sec. 1.401(k)-1(a)(6)(iv).
Q: What if I am a Partner in a Partnership receiving a year end K1 distribution but no W2 wages, when can I contribute?
A: A partner may defer (contribute to the 401k plan) on cash advance payments made during the plan year and before earned income is finally determined. The cash advance payments must be based on the value of the partner's services prior to the date of payment and must not exceed a reasonable estimate of earned income for the individual's taxable year. In addition the partner must have made a cash or deferred election before amounts are withheld from the cash advance payments. Treas. Reg. Sec. 1.401(k)-1(a)(6)(iv).
Q: What happens if I over contribute to my plan?
A: If the contributions made for you during the year exceed the limits, the excess is taxable to you.
Q: Can I make corrective distributions of excess plan contributions?
A: To correct over funding, the plan administrator may distribute the excess plan contributions (along with any income earned on the excess). The corrective distributions are reported on Form 1099-R and are still taxable. They cannot be rolled over into another plan, but are not subject to the additional tax on early distributions as follows.If excess contributions are not distributed within 12 months following the close of the plan year, the plan is subject to disqualification. [Treas Reg. 1.401-1(f)(6)(ii)].
Q: Can I take out any amount from my 401k plan for any purpose as long as I return it within 60 days to avoid taxation?
A: No. The 60 day rule is not meant to be a short term loan. It pertains to distributions taken in cash from one plan that is then deposited into another qualified plan within 60 days to avoid taxation. See http://www.irs.gov/faqs/faq-kw7.html 5.5 Pensions and Annuities: Rollovers. How long do I have to roll over a retirement distribution?
You must complete the rollover by the 60th day following the day on which you receive the distribution. (This 60-day period is extended for the period during which the distribution is in a frozen deposit in a financial institution). The IRS may waive the 60 day requirement where failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. To obtain the waiver in most cases, a request for a letter ruling must be made which include the applicable user fee. Refer to Internal Revenue Bulletin 2006-01 to get the Internal Revenue Procedure for requesting a letter ruling. A written explanation of rollover must be given to you by the issuer making the distribution. For information on distributions which qualify for rollover treatment, refer to Tax Topic 413, Rollovers from Retirement Plans. For information on the Direct Rollover Option, refer to Chapter 1 of Publication 590, Individual Retirement Arrangements (IRA's).
References:
-
Publication 17, Your Federal Income Tax
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Publication 575, Pensions and Annuity
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Tax Topic 413, Rollovers from Retirement Plans
Q: What about loans from my 401k plan?
A: Loans are available at all of our custodians up to 50% of the account balance not to exceed $50,000. The interest rate is a commercially reasonable rate. Rates considered reasonable by the Department of Labor range from a certificate of deposit rate plus 2% to the prime rate plus 1%. The rate is fixed and fully amortized. (Under our 401k program, you can have no more than two loans outstanding at any one time.) General purpose loans have a 5 year repayment period while loans for the acquisition of a primary residence can have a longer repayment period. A plan loan must be repaid within five years unless the loan is used, within a reasonable period of time, to acquire a principal residence of the participant.
A so-called principal residence loan need not be secured by the participant's principal residence to satisfy the requirements. (A refinancing generally cannot qualify as a principal residence plan loan. Refinancing, second homes and investment property have 5 year repayment terms.) However, a loan from a plan used to repay a loan from a third party will qualify as a principal residence loan [Treas. Reg. 1.72(p)-1.]
Q: Is the consent of my spouse required to take out a loan from my 401k?
A: For plan loans over $5,000 (from plans which are subject to the spousal annuity requirements), the spouse must give written consent within 90 days prior to the date the loan is made. Treas. Reg. 1.401(a)-20, Q&A 24(a) (1).
You sign a promissory note we prepare and you request a "redemption" from your custodian of your 401k account You may receive the loan proceeds by mail or with some asset custodians, for example Vanguard, you may link a bank account to your 401k to receive the proceeds of a loan electronically. With respect to repayment, you will set this up automatically from your linked bank account (at Vanguard) or through an online bill pay service at your bank (at Ameritrade and others).
Q: Can you walk me through the loan process step-by step in more detail?
A: Here is an example of how it works when Vanguard is the asset custodian, but it works much the same way with all custodians. Because the 401k plan we provide has provisions allowing loans, loans are available regardless of where you custody your money. The actual mechanics of loan funding and repayment vary slightly by custodian. (Loan funding is really a "redemption" or a "withdrawal". You are actually "borrowing" the money in your own 401k account, you are not "pledging" the money in your account in order to borrow someone else's money).
At Vanguard, in order to obtain your loan funds electronically and set up your automatic repayments by "ACH" or "EFT" (Electronic Funds Transfer), you will need to link your bank account to your 401k Plan. You can do this online at Vanguard. After you open your account and go into account options, you will see a drop down box with a bank account already listed. That bank account will have the same name as your company or 401k plan. If you do not have a bank account so entitled, or wish to use a different bank account, you will need to fill out the Money Transfer Options Kit, get your signature guaranteed by your bank and mail the completed form to Vanguard at The Vanguard Group, Small Business Services Dept. 8C1, P.O. Box 1106, Valley Forge, PA 19482-1106.
Vanguard places a 10 calendar day hold on all checks received and a 10 business day waiting period after your bank account is linked for them to “prenote“ the account to verify the account information is accurate. Once your return the promissory note to us and your bank account is linked to your 401k plan and the account and funds are seasoned (at Vanguard 10 or more days), here is how you can get your loan: Call Vanguard at 800-662-2003 and request a redemption in the amount of the promissory note from whichever fund you have sufficient money in. Check with Vanguard to ensure that there are no short-term redemption fees on the fund you are withdrawing the funds from. (You may withdraw from several funds as long as you do not exceed the total amount stated in the promissory note).
Request that the Vanguard representative set up an automatic repayment (in the amount listed on the promissory note) from your linked bank account into only one of your Vanguard funds. Set up the automatic repayments to begin 30 days after the loan is funded and end 60 months (5 years) later (if a 5 year loan-or for however many months is indicated in your promissory note). Do not execute the loan yourself until you have signed and returned the promissory note we prepared for you and you have set up your bank account link and your automatic repayments. Doing so may result in a "deemed distribution" which will trigger a 1099-R and cause you to be liable for income taxes and penalties on the entire amount of the loan.
Q: How frequently must the 401k loan repayments be made by law?
A: 401k loans require repayments to be made at least quarterly. IRC Section 72(p)(2)(C). If a loan does not call for at least quarterly payments, the entire loan is deemed a distribution at the time the loan is made. Treas. Reg. 1.72(p)-1.
Q: Who do I pay the interest on the loan to?
A: You pay it back into your own 401k account and you keep it.
Q: Is the interest on the loan tax deductible?
A: No. The interest paid is generally nondeductible. (However, if the loan is secured by a participant's principal residence, the interest is deductible as long as the participant is not a key employee. I.R.C. §72(p)(3). Key employees are officers with annual compensation in excess of $130,000, a more than 1% owner with annual compensation in excess of $150,000 or a more than 5% owner).
Q: Is there an additional fee for taking a loan?
A: No.($0 setup and $0 each year the loan remains outstanding).
Q: Does the loan appear on my credit report?
A: No. "The consumer is borrowing his or her own money, and the loans are not reported to the credit-reporting agencies," says David Rubinger, vice-president of communications for Equifax, one of the major credit bureaus.
Q: What if I don't or can't payback the loan?
A: You'll owe income taxes on the money and could get hit with a 10% early withdrawal penalty.
Q: Is the yearly administrative fee assessed on outstanding loan balances?
A: Yes.
Q: When do participant loans become taxable to a participant?
A: Participant loans in 401 (k) plans can generate taxable income to the participant if principal and interest payments are not made on a timely basis. Furthermore, if a participant loan exceeds the Tax Equity and Fiscal Responsibility Act of 1982 [TEFRA) limits (the lesser of 50 percent of the account balance or $50,000 or if it fails to satisfy the requirements of Code Section 72(p) by its terms, immediate taxation can result. [I.R.C. g 72(p)]
Q: If a participant loan becomes taxable, does the obligation to the 401 (k) plan still exist?
A: Yes. From the trustee's perspective, the fact that all or a portion of the loan is taxed to the participant does not remove the participant's obligation to the plan. The participant is still responsible for paying interest on the loan and repaying principal.
Q: May a participant loan ever be converted to a distribution?
A: Yes. If the plan permits withdrawals after age 59½, and the participant is older than age 59½, the outstanding loan may be converted to a distribution and no further obligation to the plan will exist. Similarly, if the loan was taken from an account other than a salary deferral account and in-service withdrawals are permitted from those accounts, foreclosure and distribution can occur. If the loan is still outstanding at the time of retirement or severance of employment, the obligation may be extinguished by reducing the participant's account balance by the outstanding loan. It is important to note that the loan will not be taxed twice. Once the loan is treated as taxable, it represents part of the participant's cost basis [investment in the contract).
Q: How is a taxable loan reported?
A: The amount of the default or the amount in excess of the TEFRA limits is reported on Form 1099R in the year of default or in the year the excess loan is made.
Q: My spouse does not earn income from my business but we would like to roll over his 401K into my Solo 401K plan in order to take out a loan. Is this allowed?
Q: Other than loans, when can I take a distribution of the money in my 401k plan without penalty?
Unlike SEP's and SIMPLE retirement accounts, where funds held for a participant may be withdrawn by the participant at any time, 401k plans are subject to rules that restrict a participant's access to her 401k plan accounts.
Q: What does the term "normal retirement age" mean?
Q: I will be 70 1/2 this year, it is my understanding that as long as I still continue to work I do not have to start the RMD this year and can continue to make contributions to my Solo 401 K yearly as long as I continue working. Is this correct?
A: In a company 401k setting where you are an employee who owns less than 5% of the company this would be true, (the "Required Beginning Date" [for required minimum distributions or "RMD's"] means the later of the April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2 or retires).
However for Solo 401k plans, benefit distributions to a more than 5% owner must commence by the April 1 of the calendar year following the calendar year in which the Participant attains age 70-1/2. You may continue to make contributions to your 401k plan from earned income even if you are taking RMD's.
Q: Who can rollover the proceeds of the 401k?
A: A participant and their surviving spouse can rollover to an IRA, a non-spouse beneficiary cannot rollover to an IRA. I.R.C. §402(c)(9); Treas. Reg. §1.402(c)-2.
Q: I would like to know the tax consequences of the distribution of my 401(k) upon my death if my adult son is designated as the beneficiary. Does he have to take the entire amount as a lump-sum distribution, or can he take the payout over a five-year period? If a trust is designated as the beneficiary, what are the tax rules?
A: Prior to the Pension Reform act of 2006:
Beneficiaries usually may withdraw the entire 401(k) in a lump sum if they choose, says Internal Revenue Service spokesman Jesse Weller according to Arthur M. Louis. If they prefer installments, there are generally minimum amounts that must be withdrawn.
It's extremely important to follow the rules, because there is a 50 percent penalty tax applied to any amount that should be distributed in a given year but isn't.
If you start receiving required, periodic distributions before you die, the distributions to your beneficiary must continue at least as rapidly after you die.
If you have not begun receiving such distributions before your death, your beneficiary will either have to receive distributions of the full account by Dec. 31 of the fifth year following the year you die or receive annual distributions based on the beneficiary's life expectancy.
Any rules spelled out in your 401(k) plan will determine which method the beneficiary may choose. Furthermore, the choice is supposed to be made before the next required distribution -- usually, Dec. 31 of the year following your death.
If your plan doesn't specify which method to follow, and if your designated beneficiary fails to make a choice on time, then the default is the life-expectancy method. (If you don't have a designated beneficiary, the five-year rule applies instead.)
If a trust is your beneficiary, and it meets certain requirements, the beneficiaries of the trust will be treated as beneficiaries of the 401(k) for tax purposes, and the payouts are usually pegged to their life expectancies.
If the trust does not meet the requirements, and you had started receiving distributions, the payments must be made within five years after your death. If payments had not begun, they would have to be made over your remaining life expectancy (even though you are dead!). You should consult your trust attorney if you want to name your trust as beneficiary.
A: After the Pension Reform act of 2006:
Federal law
has always allowed a spouse who inherits a 401(k) account to
put the money into his or her own retirement savings account
without penalty. But anyone else — including a child of the
deceased — typically has been required to withdraw all funds
from the account and pay taxes on the income within a matter
of months. Such an inheritance also has forced some
survivors into a higher tax bracket, further increasing
their tax burden.
Under the new provision, other heirs besides spouses will be
able to roll an inherited 401(k) account into an individual
retirement account and not pay taxes on the income
immediately, perhaps not for many years. A non-spouse heir's
tax payment schedule will be tied to the age of the
account's former owner.
Experts say the rule, which takes effect next year, could
save many heirs tens of thousands of dollars each in taxes.
Q: Can I designate my estate or a trust as a beneficiary of my 401k plan?
A: An estate cannot be a designated beneficiary of a 401k plan. [Treas. Reg. 1.401(a) (9)-4 Q&A 3]. A trust itself cannot be a designated beneficiary, but individuals who are beneficiaries of the trust are treated as designated beneficiaries if the trust meets the following requirements:
1. It is valid under state law (or would be valid but for the fact that there is no trust corpus)
4. A copy of the trust instrument or a certified list of beneficiaries is provided to the plan.
[Treas. Reg 1.401(a) (9)-4 Q&A 5].
Q: Can I have a workplace or company 401k and my own Solo 401k plan at the same time?
For example, you may not defer the maximum as an employee at work ($15,500 in 2007) and then another $15,500 into your Solo 401k as an employee of your own company. If you defer (contribute) say $6,000 as an employee at work, you can defer (contribute) up to $9,500 as an employee into your Solo 401k (as long as you have earned income from self-employment of at least that amount).
The real advantage comes in on the profit sharing side, where if your employer does not contribute the maximum remaining on your behalf as an employer contribution (over and above the amounts you have deferred as an employee into the plan) you may contribute the maximum remaining (not to exceed $45,000 combined employee and employer contributions if under age 50, $50,000 if 50 or over (2007)) into your Solo 401k plan (if your compensation from self-employment warrants it-roughly 20% of net earned income for Solo Proprietors and 25% of W-2 wages for corporations).
Q: Can I have a Solo 401k plan and a traditional IRA at the same time?
A: Yes you can. However, the two are related in that if you are an active participant in a qualified plan (say, for example, a Solo 401k plan) limits are placed on the amount of a contribution to a traditional IRA that is deductible. For single individuals and heads of households, the part of the contribution to a traditional IRA that is deductible phases out ratably if MAGI is more than $45,000 and less than $55,000 in 2004. In 2005, it phases out ratably if MAGI is more than $50,000 and less than $60,000. However, the amount deductible will be at least $200 if the MAGI is less than the high end of the phase out range.
Q: Can I have a Solo 401k plan and a ROTH IRA at the same time?
A: Yes you can. The two are not related. They each have their own contribution limits and contributing to one does not reduce the contributions you can make to the other. However, the right to make contributions to a ROTH IRA phases out if MAGI exceeds certain specified limits, regardless of whether the individual is an active participant in a qualified plan.
Q: Can I have a Solo ROTH 401k account and a ROTH IRA at the same time?
A: Yes you can. The two are unrelated. They each have their own contribution conditions and limits and contributing to one does not reduce the contributions you can make to the other. The citation for this authority is a telephone message left on our voice mail on 2-21-2007 at 9:52 a.m. by Don Curlzyk of the IRS, in response to an email we sent to retirementplanquestions@irs.gov. Mr. Curlzyk's telephone number is 513-263-3573.
Q: Can I have a SEP-IRA and a Solo 401k plan at the same time?
A: Yes you can but the two plans are treated as one for purposes of determining your maximum contribution limits. Since the Solo 401k allows for greater deductions on less income, having both may not make the most sense. Further, according to Mr. Boldragini ID#31-08350 of the IRS if you want to have both a SEP-IRA and a Solo 401k, you may not contribute to both in a given tax year unless you used a plan document other than the IRS model document for the SEP-IRA (i.e. IRS Form "5305-SEP"). You must have used a prototype plan document or an individually designed plan document for the SEP-IRA, which allows for multiple plans and apportionment and aggregation of contributions. However, you do not need to terminate the SEP-IRA in order to open or maintain a Solo 401k, (you simply cannot contribute to the SEP-IRA in the same tax year as your contributions to a Solo 401k). You can keep an existing SEP-IRA dormant (no contributions) alongside a Solo 401k. (This true even if the dormant SEP-IRA is the IRS model document for the SEP-IRA (i.e. IRS Form "5305-SEP").
Q: Can I have a SIMPLE-IRA and a Solo 401k plan at the same time?
A: No you may not. Because SIMPLE plans often have exclusive plan rules, they are generally not allowed alongside a Solo 401k. However, you can easily terminate your SIMPLE plan and start and contribute to a Solo 401k for this year. Here is where you can find information about SIMPLE plans and how the IRS says to terminate the SIMPLE. http://www.irs.gov/retirement/article/0,,id=111420,00.html If you are employed and your company, which you do not own, sponsors a SIMPLE, your participation in it does not preclude you from opening a Solo 401k with separate earned income from self-employment.
Q: Can I roll a SIMPLE-IRA into a Solo 401k plan?
A: IRS Publication 590, a copy of which you can obtain here, says on page 100:
"After the two year period, amounts in a SIMPLE IRA can be rolled over or transferred tax free to an IRA other than a SIMPLE IRA, or to a qualified plan, a tax sheltered annuity plan (Section 403(b), or deferred compensation plan of a state or local government." (emphasis added). Since a Solo 401k plan is a "qualified plan", so yes you can roll a SIMPLE IRA into a SOLO 401k after two years.
A: (a) Yes, an IRA is subject to the required minimum distribution rules provided in section 401(a)(9). In order to satisfy section 401(a)(9) for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2003, the rules of Sec. Sec. 1.401(a)(9)-1 through 1.401(a)(9)-9 and 1.401(a)(9)-6 for defined contribution plans must be applied, except as otherwise provided in this section.
Q: Is the required minimum distribution from one IRA of an owner permitted to be distributed from another IRA in order to satisfy section 401(a)(9)?
A: Yes, the required minimum distribution must be calculated separately for each IRA. The separately calculated amounts may then be totaled and the total distribution taken from any one or more of the individual's IRAs under the rules set forth in this A-9.
Generally, only amounts in IRAs that an individual holds as the IRA owner may be aggregated. However, amounts in IRAs that an individual holds as a beneficiary of the same decedent and which are being distributed under the life expectancy rule in section 401(a)(9)(B)(iii) or (iv) may be aggregated, but such amounts may not be aggregated with amounts held in IRAs that the individual holds as the IRA owner or as the beneficiary of another decedent. Distributions from section 403(b) contracts or accounts will not satisfy the distribution requirements from IRAs, nor will distributions from IRAs satisfy the distribution requirements from section 403(b) contracts or accounts. Distributions from Roth IRAs (defined in section 408A) will not satisfy the distribution requirements applicable to IRAs or section 403(b) accounts or contracts and distributions from IRAs or section 403(b) contracts or accounts will not satisfy the distribution requirements from Roth IRAs.
Q: I currently have a money purchase pension plan that does not allow you to borrow against your balance. I would like to start a new 401K that does allow loans and roll the money from the money purchase pension into it so I will have two retirement funds. Please let me know if this is possible.
A: To satisfy IRC Section 401(a), the assets and liabilities transferred from Plan A to Plan B must remain subject to the restrictions on distributions applicable to a qualified money purchase pension plan. In order to remain qualified, any plan provision applicable to the accrued benefits derived from Plan A must not permit distributions prior to retirement, death, disability, severance of employment, or termination of the plan.
Money Purchase plans have the same deduction limitations as the profit sharing portion of 401k plans, so in most cases there is no need for an employer to maintain both plans to achieve its retirement plan objectives. As a result, many employers either terminate their money purchase plans or merge them into their 401k plans. So, yes, you can merge the two, but you need to keep the money purchase money in a separate 401k account, subject to the joint and survivor rules, inside of your 401k.
A: If an eligible retirement plan separately accounts for amounts attributable to rollover contributions to the plan, are distributions of those amounts subject to the restrictions on permissible timing that apply, under the applicable requirements of the Internal Revenue Code, to distributions of other amounts from the plan? Rev. Rul. 2004-12
A: Prior to the enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), Pub. L.107-16, certain restrictions applied to rollovers by individuals of funds accumulated in retirement plans maintained by their employers or in IRA's maintained by the individuals. Sections 641 through 643 of EGTRRA (as amended by § 411 of the Job Creation and Worker Assistance Act of 2002, Pub. L. 107-147) substantially increased the rollover opportunities available to individuals, by expanding both the types of plans eligible to accept rollovers and the types of funds that can be rolled over.
Rules applicable to rollovers (including the new portability rules) are contained in the following sections of the Code:
(1) Section 402(c) provides that if any amount paid from a qualified trust in an eligible rollover distribution is transferred to an eligible retirement plan in a rollover that meets the requirements of that section, the amount transferred is not includible in gross income for the taxable year in which paid. Similar rules apply to § 403(a) annuity plans, § 403(b) tax-sheltered annuities, IRAs and § 457 eligible governmental plans.
(2) Section 402(c)(2) provides that the portion of an eligible rollover distribution that would otherwise not be includible in gross income cannot be rolled over unless such previously taxed amounts are transferred either (i) in a direct trustee-to-trustee transfer to a defined contribution plan qualified under § 401(a) that agrees to separately account for such amounts or (ii) to an IRA.
(3) Section 401(a)(31) requires that a qualified trust provide for the direct trustee to-trustee transfer (a "direct rollover") of eligible rollover distributions. In the case of previously taxed amounts, the limitations described in the preceding paragraph apply. Similar rules apply to § 403(a) annuity plans, § 403(b) tax-sheltered annuities and § 457 eligible governmental plans. (See §§ 403(a)(5), 403(b)(10) and 457(d)(1)(C).)
(4) Section 408(d)(3)(A) provides that previously taxed amounts distributed from an IRA may only be rolled over to another IRA.
(5) Section 402(c)(10) provides that a § 457 eligible governmental plan may not accept a rollover from another type of eligible retirement plan unless it separately accounts for such rollover. Section 72(t)(9) provides that a distribution from such separate account is subject to the 10-percent additional tax under § 72(t) as if the distribution were from a plan described in § 401(a).
(6) Section 402(f) requires that the recipient of an eligible rollover distribution be apprised of the fact that, if the distribution is rolled over to an eligible retirement plan, distributions from such eligible retirement plan may be subject to restrictions and tax consequences that are different from those applicable to distributions from the plan making the eligible rollover distribution. (See § 402(f)(1)(E).)
Distribution Rules Applicable to Rollovers
In many instances, the Code, or Income Tax Regulations or other guidance issued by the Service, provides explicitly for the treatment of rollover contributions. For example, the survivor annuity requirements of §§ 401(a)(11) and 417 apply to all "benefits provided under a plan, including benefits attributable to rollover contributions" (§ 1.401(a)-20, Q&A-11).
Similarly, pursuant to § 411(a)(11)(D), in determining whether an employee's accrued benefit exceeds $5,000 (and thus may not be immediately distributed without the consent of the employee), a plan may provide that rollover contributions (and attributable earnings) are disregarded.
In other instances, rollovers are implicitly included. For example, § 72(t) imposes a 10-percent additional tax on a taxpayer who receives “any amount” from a qualified retirement plan (within the meaning of § 4974(c)) except as otherwise provided in § 72(t); the reference to “any amount” and the lack of an exception for amounts attributable to rollover contributions indicate that § 72(t) is applied without regard to whether the amounts distributed are attributable to rollover contributions.
Q: What if I own part of another company that has employees yet I also earn self-employment income in my own company. Am I still eligible for a Solo 401k and do I need to offer the employees of the other company (of which I am a part owner) the opportunity to participate in my Solo 401k?
A:. If you (and your spouse, if
any, together) own less than 50.01% of the other company
(the one with employees) then the two companies
are treated as separate employers
and can maintain separate retirement
plans. In other words, you can
have a Solo 401k and need not worry about offering it to the
employees of the other company of which you are only a part
owner (the one with employees)...It is where you (or you and
a spouse) own 50.01% or more of another company, that the
two companies are treated as one employer and you lose your
ability to have a Solo 401k... (The company with employees
can always sponsor a company 401k...)
Q: Can I restrict participation to employees who have worked 2
years with a minimum of 1,000 hours to qualify for a year?
A: A 401k plan may require up to one year of service before
allowing employees to make elective contributions. [Treas. Reg.
Sec. 1-401(k)-1(e)(5)]. (You may also require a minimum of 1,000
hours to qualify for a year.) If a 401k Plan also provides for
employer contributions, employees can be required to complete up
to two years of service before becoming entitled to receive
those contributions. In that case however, the law requires
employees to be 100% vested in their accounts attributable to
employer contributions. [I.R.C. Sec. 410(a)(1)(B)(i)].
Q: What is a Safe Harbor 401k Plan?
You can achieve a Safe Harbor plan by making employer contributions on behalf of all non-highly compensated employees. (Under a Safe Harbor plan, 100% of all employer contributions are immediately vested).
To remain exempt from ACP testing, all matching contributions must be allocated on a nondiscriminatory basis. Placing an allocation restriction, such as a last-day rule or a 1,000 hours-of-service requirement, on any matching contribution provided by the plan is discriminatory unless all non-highly compensated participants satisfy the restrictions.
Under the original safe harbor plan rules, the only short plan year allowed for safe-harbor plans was the first plan year. Unless an employer organization was in existence less than three months, the first plan year had to be at least three months long. The Final Regulations have added additional opportunities to use a short-plan year (a plan year of less than 12 months) for safe-harbor plans.
Your 401k plan can exclude any part time employees (less than 1,000 hours per year or those that are covered by collective bargaining (union members) or those under the age of 21.) Otherwise, you must offer 401k participation to all employees who work more than 1,000 hours per year and are not covered by a collective bargaining agreement (union members) and are over the age of 21.
Nevertheless, otherwise eligible employees can make a one-time election not to participate in the plan or any other 401k plan maintained (presently or in the future) by the Employer and will become non-eligible to defer salary and will not be considered when testing the 401k side of the plan. However, even employees that make a one-time election not to participate in the plan or any other 401k plan maintained (presently or in the future) by the Employer may still be entitled to a profit sharing allocation.
Q: Our profit sharing plan (without 401(k)) is currently set up to provide for a 2 yr. waiting period and then 20% vesting per year for any employee who works over 1,000 hrs. We would prefer not to have to contribute for an employee at all and are considering using employee leasing (which our plan allows) rather than have to contribute. Is there ANY plan structure that would allow us to have an employee who works more than 1000 hrs. and not contribute? Would a 401(k) allow this?
A: Perhaps, but it is complicated. Taxpayers that utilize the services of leased employees may request a determination as to whether their plan qualifies by following the determination letter procedure issued in Notice 83-12, 1983-2 C.B. 412 (relating to procedures for obtaining determination letters on the qualification of pension, profit-sharing, and stock bonus plans that have been amended to comply with the changes made by the Tax Equity and Fiscal Responsibility Act of 1982). TEFRA amended the Internal Revenue Code to provide that for purposes of certain employee benefit provisions, a "leased employee" generally shall be treated as an employee of the person for whom such leased employee performs services (the "recipient" of the services) even though such individual is a common law employee of the leasing organization.
A person is considered to have performed services on a substantially full-time basis for a period of at least one year if: (1) during any consecutive 12-month period such person has performed at least 1500 hours of service for the recipient, or (2) during any consecutive 12-month period such person performs services for the recipient for a number of hours of service at least equal to 75 percent of the average number of hours that are customarily performed by an employee of that recipient in the particular position. The performance of services for a recipient includes the performance of services for an organization relative to the recipient in accordance with section 103(b)(6)(C).
For example, assume that Corporation X leases Individual A from Leasing Company Y to perform bookkeeping duties. Leasing Company Y does not maintain a retirement plan. It is customary for bookkeepers who are employed by Corporation X to perform services 35 hours per week or 1820 hours per year. During the next consecutive 12-month period, A performs 1450 hours of service for X. A does not meet the first test of "substantially full-time" because A did not perform 1500 hours of service. However, A does meet the second test for "substantially full-time" because A performed services for a number of hours at least equal to 75 percent of the number of hours that are customarily performed by an employee in that particular position (.75 x 1820 hours = 1365 hours customarily performed). Therefore, A is a "leased employee" of Corporation X.
Q: What is a principal owner?
A: A principal owner is an individual who owns 5% or more of the parent organization. [Treas. Reg. Section 1.414(c)-3(d)(2), 1.1563-2(b)(2)(ii)]
Q: What is a Highly Compensated Employee (HCE)?
A: A highly compensated employee (HCE) is a individual with more than 5% ownership or employees employees making more than $95,000 per year (in 2005).
Q: What are the minimum coverage rules?
A: The minimum coverage rules require employers to make a 401kPlan available to a cross section of employees. Plans that automatically satisfy the minimum coverage rules include a plan maintained by an employer that has no non-highly compensated employees at any time during the plan year. [Treas. Reg. Section 1.410(b)-2(b)(5).
Q: What is the ratio percentage test?
A: The ratio percentage test requires that the percentage of NHCE's benefiting under the plan be at least 70 percent of the percentage of HCE's benefiting under the plan. [Treas. Reg. Section 1.410(b)-2(b)(2)].
Q: What is the average benefits test?
A: The average benefits test consists of two separate tests, both of which must be satisfied. The two tests are the non-discriminatory classification test and the average benefit percentage test. [Treas. Reg. Section 1.410(b)-4(a)].
Q: What is the non-discriminatory classification test?
A: The non-discriminatory classification test requires the 401k plan to benefit a class of employees established by the employer that is both reasonable and non-discriminatory. [Treas. Reg. Section 1.410(b)-4(a)].
Q: What is the average benefit percentage test?
A: The average benefit percentage test is one that requires the average benefit percentage of the 401k plan for the plan year to be at least 70%. [Treas. Reg. Section 1.410(b)-5(a)].
Q: How is the average benefit percentage calculated?
A: The average benefit percentage is determined by dividing the actual benefit percentage of the NHCE's in plans in the testing group for the testing period by the actual benefit percentage of the HCE's in the plans in the testing group for the testing period. [Treas. Reg. Section 1.410(b)-5(b)].
1: The ADP of the group of eligible HCE's is not more than 125 percent of the eligible NHCE's or
2: THE ADP of the eligible HCE's is not more than 2 percentage points greater than the ADP of the NHCE's and the ADP of the eligible HCE's is not more than 2 times the ADP of the eligible NHCE's.
ADP for NHCE's ADP for HCE's Rule Used
1 2 Times 2
2 4 Plus 2
3 5 Plus 2
4 6 Plus 2
5 7 Plus 2
6 8 Plus 2
7 9 Plus 2
8 10 Times 1.25
9 11.25 Times 1.25
10 12.5 Times 1.25
Example 1: If the ADP of the NHCE's is 1.23%, the ADP of the HCE's can be no greater than 1.23 times 2, or 2.46%.
Example 2: If the ADP of the NHCE's is 7.43%, the ADP of the HCE's can be no greater than 7.43 plus 2 or 9.43%.
Example 3: If the ADP of the NHCE's is 9.87%, the ADP of the HCE's can be no greater than 9.87 times 1.25, or 12.34%
Q: What is a Top Heavy 401k Plan and what does that mean?
A: Top-Heavy Definition for a Defined Contribution Plan:
As of the determination date when the aggregate value of the plan accounts of key employees exceeds 60% of the aggregate value of the plan accounts of all employees. A key employee is an employee, who at any time during the plan year containing the determination date is a more than 5% owner of the employer or a more than 1% owner of the employer with annual compensation greater than $150,000 (family attribution rules apply) or an officer with annual compensation greater than $130,000 (2004) (This number is indexed: The dollar limit is anticipated to increase to $135,000 in 2005). The authority of a job is used to determine “officer” status, rather than officer title. The determination date is the last day of the preceding plan year. For example, for a calendar year plan for the 2005 top-heavy test, the determination date would be December 31, 2004.
For the first plan year, the last day of the first plan year would be the determination date for both the first plan year and the second plan year. For example for a calendar year plan which started in 2004, the 2004 plan year determination date would be December 31, 2004, and the determination date for the 2005 plan year would also be December 31, 2004.
Vesting Requirements for a Plan That Is Top Heavy:
Cliff Vesting: 3 Year Maximum Term
Graded Vesting: Maximum Term is 6 years also known as the 2/20 schedule. Specifically:
Year 1 = 0% Vested
Year 2 = 20% Vested
Year 3 = 40% Vested
Year 4 = 60% Vested
Year 5 = 80% Vested
Year 6 = 100% Vested
Allocation Requirement for a 401k Plan That Is Top Heavy:
3% of compensation or if the highest actual allocation to any key employee is less than 3% of compensation, then that is the rate to be used for the top-heavy allocation. (Elective deferrals contributed by a key employee are an employer allocation which will trigger a top-heavy allocation requirement for non-key employees.)
The top-heavy allocation is provided to all non-key plan participants who are active employees on the last day of the plan year regardless of actual hours of service performed. Thus, there may be no 1,000-hour requirement for a top-heavy allocation and anyone employed on the last day of the year who is eligible to participate in the plan is to receive a top-heavy allocation. A plan document may also call for the top-heavy contribution to be provided to the key employees also.
A Safe Harbor 401(k) Plan in which the only allocations made to the plan are elective deferrals and the safe harbor contribution will avoid top heavy testing. See Rev. Rul. 2004-13. Plans with fewer than 100 employees are the plans most likely to become top heavy and thus be affected by the top-heavy rules.
A: As a Plan Administrator of a Company 401k plan (with multiple W2 employees), what documents to I have to file and furnish?
The Code of Federal Regulations (29 CFR 2520.104b-10) sets forth certain obligations of 401k Plan Administrators to provide a summary annual report of the 401k plan as follows:
Obligation to furnish. The administrator of any employee benefit plan shall furnish annually to each participant of such plan and to each beneficiary receiving benefits under such plan (other than beneficiaries under a welfare plan) a summary annual report conforming to the requirements of this section. Such furnishing of the summary annual report shall take place in accordance with the requirements of Sec. 2520.104b-1 of this part. The summary annual report shall be furnished within nine months after the close of the plan year.
Contents, style and format. The summary annual report furnished to participants and beneficiaries of an employee pension benefit plan shall consist of a completed copy of the form prescribed in paragraph (d)(3) of this section. The information used to complete the form shall be based upon information contained in the most recent annual report of the plan which is required to be filed in accordance with section 104(a)(1) of the Act.
Where the plan administrator determines that additional explanation of any information furnished pursuant to this paragraph (d) is necessary to fairly summarize the annual report, such explanation shall be set forth following the completed form required by this paragraph (d) and shall be headed, ``Additional Explanation.''
Form for Summary Annual Report Relating to Pension Plans.
Summary Annual Report for (name of plan)
This is a summary of the annual report for (name of plan and EIN) for (period covered by this report). The annual report has been filed with the Pension and Welfare Benefits Administration, as required under the Employee Retirement Income Security Act of 1974 (ERISA).
Basic Financial Statement
Benefits under the plan are provided by voluntary contributions of employees and either discretionary or mandatory contributions by the company. Plan expenses were ($ ). These expenses included ($ ) in administrative expenses and ($ ) in benefits paid to participants and beneficiaries, and ($ ) in other expenses. A total of ( ) persons were participants in or beneficiaries of the plan at the end of the plan year, although not all of these persons had yet earned the right to receive benefits.
The value of plan assets, after subtracting liabilities of the plan, was ($ ) as of (the end of the plan year), compared to ($ ) as of (the beginning of the plan year). During the plan year the plan
experienced an (increase) (decrease) in its net assets of ($ ) This (increase) (decrease) includes unrealized appreciation or depreciation in the value of plan assets; that is, the difference between the value of the plan's assets at the end of the year and the value of the assets at the beginning of the year or the cost of assets acquired during the year. The plan had total income of ($ ), including employer contributions of ($ ), employee contributions of ($ ), (gains) (losses) of ($ ), from the sale of assets, and earnings from investments of ($ ).
You have the right to receive a copy of the full annual report, or any part thereof, on request. The items listed below are included in that report: [Note--list only those items which are actually included in the latest annual report]
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1. an accountant's report;
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2. financial information and information on payments to service providers;
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3. assets held for investment;
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4. fiduciary information, including non-exempt transactions between the plan and parties-in-interest (that is, persons who have certain relationships with the plan);
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5. loans or other obligations in default or classified as uncollectible;
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6. leases in default or classified as uncollectible;
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7. transactions in excess of 5 percent of the plan assets;
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8. insurance information including sales commissions paid by insurance carriers;
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9. information regarding any common or collective trusts, pooled separate accounts; master trusts or 103-12 investment entities in which the plan participates, and
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10. actuarial information regarding the funding of the plan.
To obtain a copy of the full annual report, or any part thereof, write or call the office of (name), who is (state title: e.g., the plan administrator), (business address and telephone number). The charge to cover copying costs will be ($ ) for the full annual report, or ($ ) per page for any part thereof.
You also have the right to receive from the plan administrator, on request and at no charge, a statement of the assets and liabilities of the plan and accompanying notes, or a statement of income and expenses of the plan and accompanying notes, or both.
If you request a copy of the full annual report from the plan administrator, these two statements and accompanying notes will be included as part of that report. The charge to cover copying costs given above does not include a charge for the copying of these portions of the report because these portions are furnished without charge.
You also have the legally protected right to examine the annual report at the main office of the plan, at any other location where the report is available for examination, and at the U.S. Department of Labor in Washington, D.C., or to obtain a copy from the U.S. Department of Labor upon payment of copying costs.
Requests to the Department should be addressed to: Public Disclosure Room, Room N5638, Pension and Welfare Benefits Administration, U.S. Department of Labor, 200 Constitution Avenue, N.W., Washington, D.C. 20210.
Foreign languages. In the case of either--
(1) A plan which covers fewer than 100 participants at the beginning of a plan year in which 25 percent or more of all plan participants are literate only in the same non-English language; or
(2) A plan which covers 100 or more participants in which 500 or more participants or 10 percent or more of all plan participants, whichever is less, are literate only in the same non-English language--
The plan administrator for such plan shall provide these participants with an English-language summary annual report which prominently displays a notice, in the non-English language common to these participants, offering them assistance. The assistance provided need not involve written materials, but shall be given in the non-English language common to these participants. The notice offering assistance shall clearly set forth any procedures participants must follow to obtain such assistance.
Furnishing of additional documents to participants and beneficiaries.
A plan administrator shall promptly comply with any request by a participant or beneficiary for additional documents made in accordance with the procedures or rights described in paragraph (d) of this section.
APPENDIX TO Sec. 2520.104b-10--THE SUMMARY ANNUAL REPORT (SAR) UNDER
ERISA: A CROSS-REFERENCE TO THE ANNUAL REPORT
|
SAR Item |
Form 5500 Large Plan Filer Line Items |
Form 5500 Small Plan Filer Line Items |
|
A. PENSION PLAN |
|
|
|
1. Funding arrangement |
Form 5500--9a |
Form 5500--9a |
|
2. Total plan expenses |
Schedule H—2 |
Schedule I--2i. |
|
3. Administrative expenses |
Schedule H--2i(5) |
Not applicable |
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4. Benefits paid |
Schedule H--2e(4) |
Schedule I--2e |
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5. Other expenses |
Schedule H--Subtract the sum of 2e(4) & 2i(5) from 2j |
Schedule I--2h |
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6. Total participants |
Form 5500--7f |
Form 5500--7f |
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7. Value of plan assets (net): a. End of plan year |
Schedule H--1l [Col. (b)]
|
Schedule I--1c [Col. (b)] |
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7. Value of plan assets (net): b. Beginning of plan year |
Schedule H--1l [Col. (a)] |
Schedule I--1c [Col. (a)] |
|
8. Change in net assets |
Schedule H--Subtract 1L [Col. (a) from 1L [Col. (b)] |
Schedule I--Subtract 1c [Col. (a) from 1c [Col. (b)] |
|
9. Total income |
Schedule H--2d |
Schedule I--2d |
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9a. Employer contributions |
Schedule H--2a(1)(A) & 2a(2) if applicable |
Schedule I--2a(1) & 2b if applicable |
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9b. Employee contributions |
Schedule H--2a(1)(B) & 2a(2) if applicable |
Schedule I--2a(2) & 2b if applicable |
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9c. Gains (losses) from sale of assets |
Schedule H--2b(4)(C) |
Not applicable |
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9d. Earnings from investments |
Schedule H--Subtract the sum of 2a(3), 2b(4)(C) and 2C from 2d |
Schedule I -2c |
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10. Total insurance premiums |
Total of all Schedules. A--5b |
Total of all Schedules. A--5b |
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11. Funding deficiency: b. Defined contribution plans |
Schedule R--6c, if more than zero |
Schedule R--6c, if more than zero |
[44 FR 19403, Apr. 3, 1979, as amended at 44 FR 31640, June 1, 1979; 47 FR 31873, July 23, 1982; 54 FR 8629, Mar. 1, 1989; 65 FR 21067, Apr. 19, 2000; 65 FR 35568, June 5, 2000]
| IRS Releases K Plan Audit Guide |
| March 18, 2005 (PLANSPONSOR.com) – Responding to public requests that the Internal Revenue Service (IRS) disclose more about how it goes about auditing K plans, the IRS has released an online Examination Process Guide to clarify the process. |
|
The guide's sections cover, among other topics:
The IRS publication also provides links to the IRS Web site to help plan sponsors monitor whether their plans are in compliance (including links to the examination guidelines and the Employee Plans Compliance Resolution System). It includes a compendium of IRS guidance, forms, and other information applicable to employee plans examinations and information about getting education materials, retirement forms and publications for participants, as well as information for participants regarding their rights. The document also provides
information on plan compliance in |
IRS Circular 230 Disclosure: Any tax discussion contained in this communication was not intended or written to be used, and cannot be used by the recipient or any other person, for the purpose of avoiding any Internal Revenue Code penalties that may be imposed on such person. Any tax discussion contained in the communication was written to support the promotion or marketing of the transactions or matter discussed herein. Any taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
This information is provided as general guidance. It is not intended to be legal or tax advice. Employers should contact their legal and/or tax advisors regarding the facts and circumstances around their own retirement plan and the applicability of the issues discussed in the communication.