Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

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Topic Author
dpat
Posts: 7
Joined: Fri Nov 03, 2017 12:45 pm

Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by dpat »

I am a mortgage broker and have owned my company and been the sole employee for the last two years. For the last two years, I have maxed out my solo 401(k) at $56k.

However, I plan on hiring my first employee within the next couple of months and am trying to determine what employer-related retirement vehicles may be a good fit.

Details of business:
-S-Corp, anticipated net business income of $1.1MM-$1.2MM for 2020.
-W2 income for myself at $150,000, allowing me to contribute $57k to my solo 401(k1)

Goals:
-Allow myself to put away as much money on a tax-deferred basis as possible (hopefully near the ~$57k range or higher)
-Be able to offer my employee a plan where I can match 3-5% of their contributions

Have looked into a SEP IRA, but that would require me to also contribute a large amount to any employee I hire. If I grow and hire more employees, I am not sure if this would be sustainable.

What employment-related retirement vehicles may make sense for my situation knowing that the Solo 401(k) will soon be off the table?


Thanks in advance!
clarkdfw
Posts: 7
Joined: Wed Aug 01, 2018 6:01 pm

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by clarkdfw »

Check out SIMPLE IRA
Spirit Rider
Posts: 13380
Joined: Fri Mar 02, 2007 2:39 pm

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by Spirit Rider »

If your one-participant 401k is at a provider other than Vanguard, you can elect employee eligibility restrictions. These restrictions can include up to age 21 and a minimum of one year of service >= 1,000* hours. This is elected in the adoption agreement. If you didn't elect at adoption, you can file an amended adoption agreement to do so.

If you are using Vanguard, they do not support employee eligibility restrictions. If you want them, you would have to amend your one-participant 401k plan to the new provider by using the amendment section. Then you would do a trustee -> trustee transfer from the old custodian to the new custodian.

If you have elected, amend your current adoption agreement to elect or move from Vanguard and have elected employee eligibility restrictions before you hire an employee. You can maintain the one-participant 401k plan until the employee becomes eligible. This would be one (1) year after higher for a full time employee.

*With the passage of the SECURE ACT effective on 1/1/2021, employees with >= 500 hours/year of service for >= three years are eligible. However, the counting of the years doesn't begin until 1/1/2021. Therefore, the earliest such employees become eligible is 1/1/2024.
Topic Author
dpat
Posts: 7
Joined: Fri Nov 03, 2017 12:45 pm

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by dpat »

clarkdfw wrote: Sat Sep 12, 2020 8:37 pm Check out SIMPLE IRA
Wouldn't that cap my max contribution at $13,500?
Topic Author
dpat
Posts: 7
Joined: Fri Nov 03, 2017 12:45 pm

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by dpat »

Spirit Rider wrote: Sat Sep 12, 2020 9:46 pm If your one-participant 401k is at a provider other than Vanguard, you can elect employee eligibility restrictions. These restrictions can include up to age 21 and a minimum of one year of service >= 1,000* hours. This is elected in the adoption agreement. If you didn't elect at adoption, you can file an amended adoption agreement to do so.

If you are using Vanguard, they do not support employee eligibility restrictions. If you want them, you would have to amend your one-participant 401k plan to the new provider by using the amendment section. Then you would do a trustee -> trustee transfer from the old custodian to the new custodian.

If you have elected, amend your current adoption agreement to elect or move from Vanguard and have elected employee eligibility restrictions before you hire an employee. You can maintain the one-participant 401k plan until the employee becomes eligible. This would be one (1) year after higher for a full time employee.

*With the passage of the SECURE ACT effective on 1/1/2021, employees with >= 500 hours/year of service for >= three years are eligible. However, the counting of the years doesn't begin until 1/1/2021. Therefore, the earliest such employees become eligible is 1/1/2024.
Thanks! I am not necessarily trying to delay my employee's eligibility to contribute to the plan, as I'd like them to be able to contribute within the first year. With that in mind, what type of plan would you recommend?
Spirit Rider
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Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by Spirit Rider »

As pointed out by clarkdfw, a SIMPLE IRA is a good low cost option. Yes, the employee deferral and employer contribution limits are lower, but Fidelity and some others have no administrative fees.

Your other option is a safe harbor 401k plan. it will have setup and annual administrative fees in the $1,000 to $4,000 range. There are rather stringent anti-discrimination requirements limiting your employer contributions.
technovelist
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Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by technovelist »

dpat wrote: Sat Sep 12, 2020 8:29 pm I am a mortgage broker and have owned my company and been the sole employee for the last two years. For the last two years, I have maxed out my solo 401(k) at $56k.

However, I plan on hiring my first employee within the next couple of months and am trying to determine what employer-related retirement vehicles may be a good fit.

Details of business:
-S-Corp, anticipated net business income of $1.1MM-$1.2MM for 2020.
-W2 income for myself at $150,000, allowing me to contribute $57k to my solo 401(k1)

Goals:
-Allow myself to put away as much money on a tax-deferred basis as possible (hopefully near the ~$57k range or higher)
-Be able to offer my employee a plan where I can match 3-5% of their contributions

Have looked into a SEP IRA, but that would require me to also contribute a large amount to any employee I hire. If I grow and hire more employees, I am not sure if this would be sustainable.

What employment-related retirement vehicles may make sense for my situation knowing that the Solo 401(k) will soon be off the table?


Thanks in advance!
Could you hire this person as a contractor rather than as an employee? Obviously I'm not suggesting doing anything illegal or unethical.
In theory, theory and practice are identical. In practice, they often differ.
terran
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Joined: Sat Jan 10, 2015 10:50 pm

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by terran »

A SEP IRA, SIMPLE IRA, or a new 401(k) that allows employees are really your only options. The 401(k) will have the highest limits, but also the highest administration costs. Even then it's unlikely you'll hit $57k without making large contributions for your employee as well.

I have no personal experience with them, but have seen https://www.employeefiduciary.com/ and https://www.guideline.com/ mentioned around the forum. I would look into your options with them and compare to SEP/Simple in terms of total costs/benefits including administration fees, contributions to your employee's plan and tax savings. Of course, costs will continue to go up if/when you continue to hire more employees, but hopefully a good retirement plan could also be used as a hiring/retention tool.
sc9182
Posts: 358
Joined: Wed Aug 17, 2016 7:43 pm

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by sc9182 »

Would that person be somehow interested in participating in company 401(k) at your levels ? Can you sell 1 cent worth of stock to that person bring into partnership - and thus keep plan/participation intact ?

Just thinking aloud .. someone may chime-in more .. ?
Last edited by sc9182 on Tue Sep 15, 2020 9:29 am, edited 1 time in total.
sport
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Joined: Tue Feb 27, 2007 3:26 pm
Location: Cleveland, OH

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by sport »

Can you hire your employee via an employment agency? The employee would then be employed by that company instead of yours and you would legally have no employees. It would probably cost more, but you would have the freedom to continue your existing retirement plan.
ef11
Posts: 289
Joined: Sat Mar 10, 2012 10:39 pm

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by ef11 »

Spirit Rider wrote: Sat Sep 12, 2020 9:46 pm If your one-participant 401k is at a provider other than Vanguard, you can elect employee eligibility restrictions. These restrictions can include up to age 21 and a minimum of one year of service >= 1,000* hours. This is elected in the adoption agreement. If you didn't elect at adoption, you can file an amended adoption agreement to do so.

If you are using Vanguard, they do not support employee eligibility restrictions. If you want them, you would have to amend your one-participant 401k plan to the new provider by using the amendment section. Then you would do a trustee -> trustee transfer from the old custodian to the new custodian.

If you have elected, amend your current adoption agreement to elect or move from Vanguard and have elected employee eligibility restrictions before you hire an employee. You can maintain the one-participant 401k plan until the employee becomes eligible. This would be one (1) year after higher for a full time employee.

*With the passage of the SECURE ACT effective on 1/1/2021, employees with >= 500 hours/year of service for >= three years are eligible. However, the counting of the years doesn't begin until 1/1/2021. Therefore, the earliest such employees become eligible is 1/1/2024.
Spirit Rider, With the passage of the SECURE ACT does the minimum of one year of service > 1,000 house STILL apply? Or can an employer always limit employee inclusion to having > 3 years of service?
sc9182 wrote: Tue Sep 15, 2020 9:18 am Would that person be somehow interested in participating in company 401(k) at your levels ? Can you sell 1 cent worth of stock to that person bring into partnership - and thus keep plan/participation intact ?

Just thinking aloud .. someone may chime-in more .. ?
Creative idea, but I believe the person has to be at least a 3% owner of the company. So you could sell 3% of the shares to them. And you would have to reduce their salary so it equalized to what you want to pay with a 25% profit sharing contribution, and likely someone making $40-50,000/yr would not want to put $15,000 of their salary into their 401k, but maybe.
sport wrote: Tue Sep 15, 2020 9:21 am Can you hire your employee via an employment agency? The employee would then be employed by that company instead of yours and you would legally have no employees. It would probably cost more, but you would have the freedom to continue your existing retirement plan.
Another creative idea, not sure if doable but would be nice.

I will likely be in this situation myself over the next couple of years, so I appreciate the discussion.

Employee Fiduciary could potentially come up with some New Comparability 401k profit sharing plan that greatly increases contributions to you and limits them to your employee. If you contact them, they can run a scenario and put an estimate together for you for around ~$75.
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Spirit Rider
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Joined: Fri Mar 02, 2007 2:39 pm

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by Spirit Rider »

ef11 wrote: Tue Sep 15, 2020 1:33 pm
Spirit Rider wrote: Sat Sep 12, 2020 9:46 pm *With the passage of the SECURE ACT effective on 1/1/2021, employees with >= 500 hours/year of service for >= three years are eligible. However, the counting of the years doesn't begin until 1/1/2021. Therefore, the earliest such employees become eligible is 1/1/2024.
Spirit Rider, With the passage of the SECURE ACT does the minimum of one year of service > 1,000 house STILL apply? Or can an employer always limit employee inclusion to having > 3 years of service?
Yes, the one year of service >= 1,000 hours/year requirement applies and will still apply 1/1/2021, 1/2024 and into the future. You can not exclude such an employee.

The new SECURE ACT simply adds a provision that employees with three (3) of service < 1,000 hours/year but >= 500 hours/year can not be excluded.
ef11
Posts: 289
Joined: Sat Mar 10, 2012 10:39 pm

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by ef11 »

Spirit Rider wrote: Tue Sep 15, 2020 9:10 pm
ef11 wrote: Tue Sep 15, 2020 1:33 pm
Spirit Rider wrote: Sat Sep 12, 2020 9:46 pm *With the passage of the SECURE ACT effective on 1/1/2021, employees with >= 500 hours/year of service for >= three years are eligible. However, the counting of the years doesn't begin until 1/1/2021. Therefore, the earliest such employees become eligible is 1/1/2024.
Spirit Rider, With the passage of the SECURE ACT does the minimum of one year of service > 1,000 house STILL apply? Or can an employer always limit employee inclusion to having > 3 years of service?
Yes, the one year of service >= 1,000 hours/year requirement applies and will still apply 1/1/2021, 1/2024 and into the future. You can not exclude such an employee.

The new SECURE ACT simply adds a provision that employees with three (3) of service < 1,000 hours/year but >= 500 hours/year can not be excluded.
Thank you very much for clarifying!
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BoomXer
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Joined: Wed Oct 17, 2018 11:46 am

Re: Hiring my first employee, so will have to lose my Solo 401(k). What to do now?

Post by BoomXer »

My experience is dated (20 years ago). I set up a 401k/PSP plan in the early 2000's and learned that it was possible to segregate employees under a Safe Harbor 401k for purposes of the of the PSP contribution. I don't remember the specifics, but it was something like minimum 3% match for the 401k portion and an additional 3% minimum PSP contribution for the employee class. This would allow a 25% (matching plus PSP) contribution for Managers/Owners. It didn't fit our company culture to segment the workforce so every plan participant got the same PSP contribution regardless of role.

If this is still allowed you could set up a new 401k with participant classifications. You'll spend some money that you don't spend with a Solo 401k, but you'll still be able to shelter a significant amount of income for you personally that would not be available under a SIMPLE/SEP without having to make an equal contribution to your employee's account.
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