LLC partnership "individual 401k" questions

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winterescape
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LLC partnership "individual 401k" questions

Post by winterescape » Sun Jan 11, 2015 11:00 am

After a concerted search effort I have been unable to locate answers to our individual 401k questions. Any links to sources that definitively address the following 2 questions is appreciated.

We have a partnership with 10 partners, organized as an LLC with no employees, only partners and 1099 contractors. My income from the partnership is reported on schedule K-1 (form 1065) line 4 “Guaranteed Payments” As well as Line 14 box “A” Self-employment Earnings (Loss). All income from this partnership is derived from active engineering consulting activity, no passive income.

We would like to establish “individual 401k” plans for the partners.

Q1) Can we establish more than one individual 401k plan? For example, may I establish one at Vanguard using the partnership name and federal tax reporting number and another partner establish one at Schwab or Fidelity doing the same? Each partner would only participate in one of the individual 401k plans and they would have unique names.

Q2) What would be each partners “Employer contributions” limits ? Could each partner select an amount from zero up to $53,000 or 25% of compensation OR must this “employer contribution portion be uniform across all partners?
Thanks...

terran
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Re: LLC partnership "individual 401k" questions

Post by terran » Sun Jan 11, 2015 11:11 am

My understanding is that individual 401k's are limited to businesses with only one employee (plus their spouse): http://www.irs.gov/Retirement-Plans/One ... k%29-Plans

winterescape
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Re: LLC partnership "individual 401k" questions

Post by winterescape » Sun Jan 11, 2015 11:51 am

terran wrote:My understanding is that individual 401k's are limited to businesses with only one employee (plus their spouse): http://www.irs.gov/Retirement-Plans/One ... k%29-Plans


this is the type of plan I am looking at https://investor.vanguard.com/what-we-o ... idual-401k
"Sole proprietors or partners who have no common-law employees."

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TheTimeLord
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Re: LLC partnership "individual 401k" questions

Post by TheTimeLord » Sun Jan 11, 2015 11:54 am

winterescape wrote:
terran wrote:My understanding is that individual 401k's are limited to businesses with only one employee (plus their spouse): http://www.irs.gov/Retirement-Plans/One ... k%29-Plans


this is the type of plan I am looking at https://investor.vanguard.com/what-we-o ... idual-401k
"Sole proprietors or partners who have no common-law employees."


Personally I would contact Fidelity because they offer better investment options and customer service for Individual 401ks than Vanguard IMHO.
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ERISA Stone
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Re: LLC partnership "individual 401k" questions

Post by ERISA Stone » Mon Jan 12, 2015 1:15 pm

I thought I read on here somewhere that you can have a solo(k) for each partner but I can't find the thread. However, another solution to your situation is to adopt a standard 401(k) plan. Assuming all partners are equal owners, all participants are HCEs so there is no nondiscrimination testing to worry about. You could also set up your profit sharing allocation formula as new comparability (AKA cross-testing) and could choose to give each participant whatever % you choose, up to the contribution limits.

Of course, if you have a common plan, you will have to file a 5500, rather than waiting until assets cross $250k for solo(k)'s. Also, a plan document will likely cost more with the new comparability formula, rather than doing the standard pro rata.

I'm sure there are a few other differences but this can get you started.

winterescape
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Re: LLC partnership "individual 401k" questions

Post by winterescape » Mon Jan 12, 2015 2:41 pm

ERISA Stone wrote:I thought I read on here somewhere that you can have a solo(k) for each partner but I can't find the thread. However, another solution to your situation is to adopt a standard 401(k) plan. Assuming all partners are equal owners, all participants are HCEs so there is no nondiscrimination testing to worry about. You could also set up your profit sharing allocation formula as new comparability (AKA cross-testing) and could choose to give each participant whatever % you choose, up to the contribution limits.

Of course, if you have a common plan, you will have to file a 5500, rather than waiting until assets cross $250k for solo(k)'s. Also, a plan document will likely cost more with the new comparability formula, rather than doing the standard pro rata.

I'm sure there are a few other differences but this can get you started.


Thanks for the input. I have found conflicting information regarding each partner having their own individual 401k. so if you do find the thread or a link to something definitive that would be most helpful. My understanding is that the "individual" is a misnomer when it comes to a partnership as it is the partnership that is the "employer" and you use the partnership federal tax ID number to establish the plan. Each partner can then chose to have an account, or not.

Not to confuse the issue I neglected to mention that we actually have a 401k plan now but due to the cost, administrative issues, compliance testing, etc we are going to dissolve it and let each partner do their own thing.

ERISA Stone
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Re: LLC partnership "individual 401k" questions

Post by ERISA Stone » Mon Jan 12, 2015 3:34 pm

Your provider probably won't tell you this but assuming you have all HCE's, in your case - all owners own greater than 5%, there's no compliance testing to be done. You would still need to make sure all participants receive contributions according to the plan document, and that no one exceeds relevant limits but that's about it. You might consider asking for a discount related to testing.

Spirit Rider
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Re: LLC partnership "individual 401k" questions

Post by Spirit Rider » Mon Jan 12, 2015 4:35 pm

You are correct, the terms Solo 401k, Individual 401k, etc... are marketing terms and misnomers for what the plans actually are. There is no such thing as a Solo 401k plan in the U.S. Code or IRS regulations. Even the IRS muddies the water by referring to one-participant 401k plans.

They are not separate Code/Regulation plans but rather a set of extensions/exceptions to normal 401k rules. The key being there are no statutory employees, only owner-employees. The primary reason that these are separately marketed plans by the financial institutions from standard 401k plans is as ERISA Stone stated, because of the compliance issues (or lack there of). There are no anti-discrimination testing requirements, etc.. Therefore, the cost to the financial institution is greatly reduced.

I agree there is conflicting information on this and probably a variety of situations have/do exist. This is probably why the financial institutions are increasingly requiring EINs to open so called Solo 401ks (they did/do not always do so). There were and are surely partners who opened/open Solo 401ks using their own SSN. The problem is that this whole issue of owner-employee partner 401k plans is not well described. The overwhelming majority are for individuals and optionally their spouses.

(Q1) I do believe that you are correct that the plan(s) should be created by the partnership using the partnership's EIN. Now whether the partnership can create differently numbered plans at more than one institution, I just don't know.

(Q2) I don't see why a partnership 401K plan should be any different than any other employer retirement plan with profit sharing contributions. By default those contributions should be the same percentage of compensation for all participants.

winterescape
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Re: LLC partnership "individual 401k" questions

Post by winterescape » Thu Jan 15, 2015 4:23 pm

Spirit Rider wrote:You are correct, the terms Solo 401k, Individual 401k, etc... are marketing terms and misnomers for what the plans actually are. There is no such thing as a Solo 401k plan in the U.S. Code or IRS regulations. Even the IRS muddies the water by referring to one-participant 401k plans.

They are not separate Code/Regulation plans but rather a set of extensions/exceptions to normal 401k rules. The key being there are no statutory employees, only owner-employees. The primary reason that these are separately marketed plans by the financial institutions from standard 401k plans is as ERISA Stone stated, because of the compliance issues (or lack there of). There are no anti-discrimination testing requirements, etc.. Therefore, the cost to the financial institution is greatly reduced.

I agree there is conflicting information on this and probably a variety of situations have/do exist. This is probably why the financial institutions are increasingly requiring EINs to open so called Solo 401ks (they did/do not always do so). There were and are surely partners who opened/open Solo 401ks using their own SSN. The problem is that this whole issue of owner-employee partner 401k plans is not well described. The overwhelming majority are for individuals and optionally their spouses.

(Q1) I do believe that you are correct that the plan(s) should be created by the partnership using the partnership's EIN. Now whether the partnership can create differently numbered plans at more than one institution, I just don't know.

(Q2) I don't see why a partnership 401K plan should be any different than any other employer retirement plan with profit sharing contributions. By default those contributions should be the same percentage of compensation for all participants.


Thanks, that is helpful...

winterescape
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Re: LLC partnership "individual 401k" questions

Post by winterescape » Thu Jan 15, 2015 4:24 pm

ERISA Stone wrote:Your provider probably won't tell you this but assuming you have all HCE's, in your case - all owners own greater than 5%, there's no compliance testing to be done. You would still need to make sure all participants receive contributions according to the plan document, and that no one exceeds relevant limits but that's about it. You might consider asking for a discount related to testing.


Interesting, Thanks...

winterescape
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Re: LLC partnership "individual 401k" questions

Post by winterescape » Fri Aug 11, 2017 2:33 pm

Well 2 + years later and I am revisiting the same question.

This year Vanguard suggested that I acquire an EIN just for myself, and that each partner do the same, and then we each open a plan that way. As I read the description for what type of EIN I want none appear to exactly describe my employment situation. I would tend to think I could open one as a "sole proprietor" however my income is NOT reported on schedule "C" it flows into my 1040 by way of schedule "E -Income or Loss From Partnerships and S Corporations"

As partners, we each pay self employment tax on our K-1 income.

I still believe that there must be an easy way to do this and hope someone new happens to read my post here and lead me in the right direction...

Thanks in advance for any suggestions or advice.

Spirit Rider
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Re: LLC partnership "individual 401k" questions

Post by Spirit Rider » Fri Aug 11, 2017 10:53 pm

Wow this is really disappointing. This is the second post where Vanguard has given blatantly false guidance about one-participant 401k plans.

26 U.S. Code § 401 - Qualified pension, profit-sharing, and stock bonus plans, (c) Definitions and rules relating to self-employed individuals and owner-employees For purposes of this section—, (4) Employer
An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (1).


Only an employer can adopt a 401k plan. The partnership is the employer and the partners are owner-employees. The partners are not employers and cannot not adopt their own one-participant 401k plans. There are no ifs ands or buts about it.

However, you need to understand the difference between 401k plans and 401k accounts. The employer is the sponsor of the plan (the partnership). Then their are trustee, custodian, record keeping, fiduciary and administrative functions provide all or in part shared between the employer and third parties. Finally, the account is owned by the participant (the partner).

It is possible to split some of this functionality to accomplish some of what you want, but is questionable if you can do this less expensively:
  • The company adopts a custom plan and acts as trustee and fiduciary (or contracts this out). As trustee they direct all contributions/distributions to/from each participant's separate account. These are at different custodians that offer individual tax advantaged accounts. The custodians only provide transactional and investment record keeping.
  • A third party administrator; provides the plan document, administers the plan, tracks plan compliance and performs IRS/participant reporting.
  • The participant selects a compatible custodian and manages their account.
This is the only way I know that you can have different accounts at different custodians. However, this must still be a single one-participant 401k plan sponsored by the partnership.

winterescape
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Re: LLC partnership "individual 401k" questions

Post by winterescape » Mon Aug 14, 2017 8:43 am

Spirit Rider,
Thanks much for your clarification, citation, and suggestions, even if it was not the answer I was hoping for...

staythecourse
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Re: LLC partnership "individual 401k" questions

Post by staythecourse » Mon Aug 14, 2017 8:49 am

Spirit Rider wrote:
Fri Aug 11, 2017 10:53 pm
Wow this is really disappointing. This is the second post where Vanguard has given blatantly false guidance about one-participant 401k plans.

26 U.S. Code § 401 - Qualified pension, profit-sharing, and stock bonus plans, (c) Definitions and rules relating to self-employed individuals and owner-employees For purposes of this section—, (4) Employer
An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partnership shall be treated as the employer of each partner who is an employee within the meaning of paragraph (1).


Only an employer can adopt a 401k plan. The partnership is the employer and the partners are owner-employees. The partners are not employers and cannot not adopt their own one-participant 401k plans. There are no ifs ands or buts about it.

However, you need to understand the difference between 401k plans and 401k accounts. The employer is the sponsor of the plan (the partnership). Then their are trustee, custodian, record keeping, fiduciary and administrative functions provide all or in part shared between the employer and third parties. Finally, the account is owned by the participant (the partner).

It is possible to split some of this functionality to accomplish some of what you want, but is questionable if you can do this less expensively:
  • The company adopts a custom plan and acts as trustee and fiduciary (or contracts this out). As trustee they direct all contributions/distributions to/from each participant's separate account. These are at different custodians that offer individual tax advantaged accounts. The custodians only provide transactional and investment record keeping.
  • A third party administrator; provides the plan document, administers the plan, tracks plan compliance and performs IRS/participant reporting.
  • The participant selects a compatible custodian and manages their account.
This is the only way I know that you can have different accounts at different custodians. However, this must still be a single one-participant 401k plan sponsored by the partnership.
Very good description. It is the EMPLOYER who runs a 401k plan. Your are an EMPLOYEE of the partnership who is the EMPLOYER. That is why for the OP there was no option that made sense when applying for a EIN.

Good luck.
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