Solo 401k for second business

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
JBTX
Posts: 6961
Joined: Wed Jul 26, 2017 12:46 pm

Solo 401k for second business

Post by JBTX »

Suppose business owner has main business, with employees, and business has safe harbor 401k plan. Individual contributions max at $19500(assume less than 50 hrs old). Assume his match is $10k. Total for owner $29.5k.

Now, the business is set up such that the facility and other equipment is set up in a separate company, presumably for liability reasons, and leases equipment to main business.

If that property business books sufficient profit, could the owner set up a solo 401k for that business, and contribute employer match of approximately $27,500, to get to $57k individual max?

If this is legit, are there any reasons not to do this?
User avatar
MP123
Posts: 1660
Joined: Thu Feb 16, 2017 3:32 pm

Re: Solo 401k for second business

Post by MP123 »

It sounds like the businesses are what's considered a "controlled group", meaning they are treated as one entity wrt 401k contributions because they have common ownership.

I'm not sure how that would apply considering the safe harbor 401k in business #1 though, it's definitely a fine point.
Spirit Rider
Posts: 13466
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401k for second business

Post by Spirit Rider »

As pointed out by @MP123, these two businesses would be considered a controlled group.

Congress has enacted laws and the IRS has promulgated regulations specifically to prevent the creation of artificial business structures just to discriminate against employees.

If you want to contribute more, there are legal ways to do so. You could investigate adding "New Comparability Method" profit sharing.

Usually, you switch from a 4% safe harbor match to a more than safe harbor 5% profit sharing baseline subject to cross testing.

Depending on the employee census, your compensation and the cross testing. You may be able to maximize the $57K at your business, but maybe with a slight adjustment to the employee percentage. Alternately, the 5% might limit you to greater but somewhat than the maximum.
Topic Author
JBTX
Posts: 6961
Joined: Wed Jul 26, 2017 12:46 pm

Re: Solo 401k for second business

Post by JBTX »

Thanks

We looked at the new comp method when we set up the 401k a couple of years ago (with help from some here) but for various reasons opted for a straight company match plan. The existing business structure already exists. I think the tax advisors/attorneys did it for liability avoidance although I'm not really sure. The question above is literally one I just thought of while reading another thread, but it sounds like the controlled group issue may prohibit such a setup?
Topic Author
JBTX
Posts: 6961
Joined: Wed Jul 26, 2017 12:46 pm

Re: Solo 401k for second business

Post by JBTX »

MP123 wrote: Tue Sep 22, 2020 8:49 pm It sounds like the businesses are what's considered a "controlled group", meaning they are treated as one entity wrt 401k contributions because they have common ownership.

I'm not sure how that would apply considering the safe harbor 401k in business #1 though, it's definitely a fine point.
Thanks. When you say it's a fine point, please elaborate?
Topic Author
JBTX
Posts: 6961
Joined: Wed Jul 26, 2017 12:46 pm

Re: Solo 401k for second business

Post by JBTX »

One clarification, the other entity, as far as I know, does not have any employees. I don't know if that makes a difference in the controlled group status.

https://www.employeefiduciary.com/401k- ... ed-groups/
Under the IRS’ controlled group rules, two or more employers with common ownership are considered a single employer for purposes of 401(k) nondiscrimination testing. These rules often obligate all members of a controlled group to cover their employees with the same 401(k) plan in order to pass annual coverage testing.
Spirit Rider
Posts: 13466
Joined: Fri Mar 02, 2007 2:39 pm

Re: Solo 401k for second business

Post by Spirit Rider »

If you have >= 80% ownership in both businesses they are part of a controlled group. Attribution rules apply for family ownership.

You are an employee. How else were you expecting to receive employee contributions.
User avatar
MP123
Posts: 1660
Joined: Thu Feb 16, 2017 3:32 pm

Re: Solo 401k for second business

Post by MP123 »

JBTX wrote: Tue Sep 22, 2020 10:20 pm
MP123 wrote: Tue Sep 22, 2020 8:49 pm It sounds like the businesses are what's considered a "controlled group", meaning they are treated as one entity wrt 401k contributions because they have common ownership.

I'm not sure how that would apply considering the safe harbor 401k in business #1 though, it's definitely a fine point.
Thanks. When you say it's a fine point, please elaborate?
I meant it's a complex issue above my pay grade because of the safe harbor plan. Normally a controlled group with a solo 401k is pretty straightforward regarding limits.
Topic Author
JBTX
Posts: 6961
Joined: Wed Jul 26, 2017 12:46 pm

Re: Solo 401k for second business

Post by JBTX »

https://www.whitecoatinvestor.com/multiple-401k-rules/

The WCI article above was very helpful, and consistent with what both of you are saying.
Post Reply