No Longer Eligible for Solo 401K. What Next?

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Topic Author
Frisky77
Posts: 3
Joined: Fri Feb 14, 2020 5:37 pm

No Longer Eligible for Solo 401K. What Next?

Post by Frisky77 » Fri Feb 14, 2020 6:25 pm

Hello,
I am a longtime lurker on these forums making my first post. Because I need something! But thanks in advance. This forum and the wikis have been of incalculable value to me these past few years. I have made great strides in my retirement and personal financial planning, and I have many of you to thank for your comments and information on this forum. Now back to me!

So I am an attorney with a private solo practice in Chicago. Not married and no kiddos. 42 years young. For the past several years I did not have my own employee and was able to take advantage of the large contribution limits with a Solo 401(k) I opened at Fidelity. I also made backdoor Roth contributions and have my HSA there as well. Over these three accounts and a small taxable account I have a total of about $340K using a basic 3 Fund Portfolio, 75/25 Stocks/Bonds.

The nature and increased volume of my practice essentially forced me to hire an assistant who works nearly full time. The employee started with me last year but did not work a total of 1,000 hours in '19 so I am able to make my contribution to the Solo 401K account for 2019. My employee works 34 hours a week so I will be well over that limit in '20.

I am making some assumptions below and I have a few questions. If any of my assumptions are wrong please let me know:

1. I think my practical choices for 2020 are to either open a SIMPLE IRA or a regular 401K. In searching the forum and doing a little research it seems Employee Fiduciary would be the choice for lower cost and less paperwork if I went the 401K route. A SIMPLE IRA could be opened at Fidelity or VG.

2. As for my own contributions I could put $13,500 into a SIMPLE IRA and $19,500 into a 401K, tax-deferred.

3. If I went with a 401K I could continue to make contributions to my Roth IRA using the backdoor method. I could not do this with a SIMPLE IRA.

4. A 401K costs more but the extra tax savings from the deferred $6K and the benefit of the Roth contribution should make that up.

5. With either option I would have to offer the same plan to my employee and offer some amount of matching funds. I am fine with doing this as I would like to offer some type of match in lieu of a salary increase.

My questions:

1. I know there are other threads on this, but if anyone reads this with first hand knowledge: how much time gets eaten up dealing with a 401K from an entity like Employee Fiduciary? I run my payroll through Gusto. I would be personally handling any paperwork and documentation involved with the account.

2. Do I have to roll over my Solo 401(K) which is now at Fidelity? Either into the new 401(k) or the SIMPLE IRA? Or can I let it sit there without making contributions? I foresee a time when I will be working alone again....perhaps in 5-10 years or so. I could not find an answer to this anywhere else.

3. Is there any consideration or possibility that I am completely missing??

Thanks again for taking the time to read and answer, and if any further info is needed let me know.

Spirit Rider
Posts: 12466
Joined: Fri Mar 02, 2007 2:39 pm

Re: No Longer Eligible for Solo 401K. What Next?

Post by Spirit Rider » Fri Feb 14, 2020 11:38 pm

  1. I don't know the answer to this question, but there are BHs who use EF. You might also want to look at Guideline.
  2. You need to terminate, "freeze*", or amend the one-participant 401k plan before the employee becomes eligible. You can not terminate** the plan if you want to continue with a 401k plan, you must amend the one-participant 401k to a plan supporting non-owner/spouse employees.
  3. The employee eligiblity is not by plan year. The employee will be eligible whenever they have worked 1,000 hours in any 12 month period and meet entry requirements. You will have to check your one-participant 401k plan eligible employee entry requirements. Most plan documents have an immediate entry requirement after meeting any eligibility restrictions.

    It isn't just "some" employer contribution you need to make. To ensure you can make the full employee deferral, you will need a safe harbor 401k plan. This requires either a 4%** employer match or a 3% non-elective employer contribution.
*The one-participant 401k plan document/provider must allow the amendment to a "frozen" plan. I am not sure it you can freeze a 401k plan and adopt a second one. Generally, a single business can not have more than one (1) 401k plan at the same time. However, I do not know if that includes a frozen plan. I would not attempt this unless verified with a TPA. It should not be necessary, because if you amended your one-participant 401k plan to an ERISA plan you can transfer the assets into the new plan.

**If you terminate a 401k plan. There is a "successor plan rule" the precludes you from adopting another 401k plan for one (1) year. The rule does not apply to a SEP or SIMPLE IRA plan.

***The minimum safe harbor employer match is 100% of the first 3% of compensation and 50% of the next 2% of compensation.

TIAX
Posts: 1286
Joined: Sat Jan 11, 2014 12:19 pm

Re: No Longer Eligible for Solo 401K. What Next?

Post by TIAX » Sat Feb 15, 2020 12:39 am

Check out ABA Retirement Funds.

Topic Author
Frisky77
Posts: 3
Joined: Fri Feb 14, 2020 5:37 pm

Re: No Longer Eligible for Solo 401K. What Next?

Post by Frisky77 » Sat Feb 15, 2020 2:31 pm

Spirit Rider wrote:
Fri Feb 14, 2020 11:38 pm
  1. I don't know the answer to this question, but there are BHs who use EF. You might also want to look at Guideline.
  2. You need to terminate, "freeze*", or amend the one-participant 401k plan before the employee becomes eligible. You can not terminate** the plan if you want to continue with a 401k plan, you must amend the one-participant 401k to a plan supporting non-owner/spouse employees.
  3. The employee eligiblity is not by plan year. The employee will be eligible whenever they have worked 1,000 hours in any 12 month period and meet entry requirements. You will have to check your one-participant 401k plan eligible employee entry requirements. Most plan documents have an immediate entry requirement after meeting any eligibility restrictions.

    It isn't just "some" employer contribution you need to make. To ensure you can make the full employee deferral, you will need a safe harbor 401k plan. This requires either a 4%** employer match or a 3% non-elective employer contribution.
*The one-participant 401k plan document/provider must allow the amendment to a "frozen" plan. I am not sure it you can freeze a 401k plan and adopt a second one. Generally, a single business can not have more than one (1) 401k plan at the same time. However, I do not know if that includes a frozen plan. I would not attempt this unless verified with a TPA. It should not be necessary, because if you amended your one-participant 401k plan to an ERISA plan you can transfer the assets into the new plan.

**If you terminate a 401k plan. There is a "successor plan rule" the precludes you from adopting another 401k plan for one (1) year. The rule does not apply to a SEP or SIMPLE IRA plan.

***The minimum safe harbor employer match is 100% of the first 3% of compensation and 50% of the next 2% of compensation.
Thank you for your response. That is a very helpful explanation.

Bosro
Posts: 17
Joined: Fri Dec 07, 2018 10:41 pm

Re: No Longer Eligible for Solo 401K. What Next?

Post by Bosro » Sun Feb 16, 2020 10:36 am

I believe the new Secure Act changes the 1,000 hour employee rule to 500 hours in 3 consecutive 12 month periods. Just for future reference.

Spirit Rider
Posts: 12466
Joined: Fri Mar 02, 2007 2:39 pm

Re: No Longer Eligible for Solo 401K. What Next?

Post by Spirit Rider » Sun Feb 16, 2020 11:41 am

Bosro wrote:
Sun Feb 16, 2020 10:36 am
I believe the new Secure Act changes the 1,000 hour employee rule to 500 hours in 3 consecutive 12 month periods. Just for future reference.
You are correct, but for way into the future reference. That provision does not take effect until 1/1/2021 and no years prior to that date count for the three (3) years. So part-time employees with >= 3 years of service with >= 500 hours/year will not become eligible employees until 1/1/2024.

gradStudentInvestor
Posts: 37
Joined: Sat Aug 04, 2012 4:47 pm

Re: No Longer Eligible for Solo 401K. What Next?

Post by gradStudentInvestor » Sun Feb 16, 2020 12:11 pm

Frisky77 wrote:
Fri Feb 14, 2020 6:25 pm
I run my payroll through Gusto. I would be personally handling any paperwork and documentation involved with the account.
We also run payroll through Gusto, and we moved our 401(k) to Guideline to take advantage of integrations between the two. Guideline handles all the documentation, compliance testing, etc.

On top of that, Guideline's fees are low (should run you well under $1k/year total) and they have a reasonable selection of low-cost index funds (my Guideline portfolio is split between Vanguard Total Stock & Total Bond).

Topic Author
Frisky77
Posts: 3
Joined: Fri Feb 14, 2020 5:37 pm

Re: No Longer Eligible for Solo 401K. What Next?

Post by Frisky77 » Mon Feb 17, 2020 2:31 pm

gradStudentInvestor wrote:
Sun Feb 16, 2020 12:11 pm
Frisky77 wrote:
Fri Feb 14, 2020 6:25 pm
I run my payroll through Gusto. I would be personally handling any paperwork and documentation involved with the account.
We also run payroll through Gusto, and we moved our 401(k) to Guideline to take advantage of integrations between the two. Guideline handles all the documentation, compliance testing, etc.

On top of that, Guideline's fees are low (should run you well under $1k/year total) and they have a reasonable selection of low-cost index funds (my Guideline portfolio is split between Vanguard Total Stock & Total Bond).
Thank you for that suggestion. I looked into Guideline and it looks like another viable option.

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