Two Solo 401Ks for self under one EIN? (both sole proprietorships)

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linlan
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Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by linlan » Thu Oct 12, 2017 8:45 am

TLDR: Two sole proprietorships, one EIN (per IRS regs), and I want two different solo 401ks. Can it be done?

Hi all! I've done a lot of googling, but I'm getting different stories from Vanguard and the IRS, so I'm hoping someone can help point me to a resource to use. I checked bogleheads for this topic, but mostly found things that didn't quite describe my situation.

I am the sole proprietor of two businesses. Here's what they are:

Business A: I write and self-publish books. I get a chunk of the profits from sales on Amazon, Kobo, iBooks, etc. I have a basic business license.

Business B: I work as a 1099 contractor for a local agency that provides therapists (physical/speech/occupational) to local school districts/governments. I have a specialized professional license from my state.

Neither of these is an LLC or S-Corp or anything like that. They're both sole proprietorships, and according to the IRS I'm supposed to use the same EIN for both.

I am getting conflicting info on solo 401Ks. I thought that I should have a different 401K for each, as they're completely separate businesses and licensed differently. But Vanguard is saying they can't put more than one 401K under the same EIN. And the IRS says I should use the same EIN for both sole proprietorships.

As I see it, here are my options:

a. Put money from both businesses into the 401K I set up for Business A.
b. Set up a different 401K for Business B with someone besides Vanguard (Fidelity, maybe?).
c. Somehow convince Vanguard to let me have two solo 401Ks for the two businesses.
d. None of the above!

Let me know your thoughts, and thanks in advance!

aristotelian
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by aristotelian » Thu Oct 12, 2017 8:54 am

I have the same issue - wife receives 1099 income for counseling private practice and for teaching yoga side gig. We do separate Schedule C's. I found previous Boglehead threads and determined to do one Solo 401k, although there may be exceptions.

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niceguy7376
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by niceguy7376 » Thu Oct 12, 2017 9:27 am

I am not an expert on this issue and hence no guidance.
But I am curious as to what you gain by having two different 401ks compared to single 401k.

EmployEE contribution is anyway limited to 18K (my assumption based on other posts on this forum for scenarios of W2 and self employed).
EmployER contribution is always based on income minus write off expenses and such.

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neurosphere
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by neurosphere » Thu Oct 12, 2017 9:47 am

linlan wrote:
Thu Oct 12, 2017 8:45 am
Business A: I write and self-publish books. I get a chunk of the profits from sales on Amazon, Kobo, iBooks, etc. I have a basic business license.

Business B: I work as a 1099 contractor for a local agency that provides therapists (physical/speech/occupational) to local school districts/governments. I have a specialized professional license from my state.
I wonder, to YOU they are two separate businesses. But to the IRS perhaps they are the same business, i.e. the business of "you". With perhaps two subsidiaries. Other than potentially running afoul of "hobby rules" if one of the businesses persistently had a loss, what would change, tax wise, if you took each schedule C and combined them line by line?

So perhaps one 401k which covers both businesses is indeed appropriate.

Or consider another option. The IRS says you SHOULD use the same SSN/EIN. But MUST you? Can you change one EIN, and that solves your problem?
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

Spirit Rider
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by Spirit Rider » Thu Oct 12, 2017 9:54 am

Taxation of multiple sole proprietor businesses and employer retirement plans for multiple sole proprietor businesses can be confusing.

The IRS prefers multiple sole proprietorships to have the same EIN. If there is minor income from one or more Principal Business or Professional Activities than an activity with major income, you can file everything on one Schedule C under the primary activity code. If the income is less skewed or you just prefer the separate accounting, you can file two or more Schedule Cs with different business activity codes. However, all of these are considered to be one employer. One employer -> a single one-participant 401k plan.

If you have more than one trade or business operating as a different business entity, then you can obtain multiple EINs. For all earned income to be used for one-participant 401k plans, you either need multiple one-participant 401k plans or single multi-employer one-participant 401k plan.

Given your specific fact pattern and desire to separately account for each business. You should file a Form 1040 Schedule C for each business activity code and use the total available net self-employment earnings for determining the one-participant 401k contribution limits and contribute to a single one-participant 401k. Note: You can only use net business profits when calculating the total. You can not use a loss to offset.

To add to the mention of the $18K employee deferral limit, multiple businesses owned by the same individual are considered a controlled group. There will only be one $54K annual addition limit. There is no benefit to be gained by having multiple one-participant 401k plans.
Last edited by Spirit Rider on Thu Oct 12, 2017 10:18 am, edited 1 time in total.

avalpert
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by avalpert » Thu Oct 12, 2017 9:59 am

Even if you had separate EINs it would still be a controlled group for 401k purposes and for controlled groups compensation limits are applied as if they are a single entity. So there would be no benefit to having a second plan anyway - you can't increase your contribution amount by doing so.

Edit: And I see Spirit Rider covered this between the time I hit reply and submit...

linlan
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by linlan » Thu Oct 12, 2017 10:02 am

Thanks for the responses, and for the links to other threads. I'm glad to hear that at least one other person has done one single 401k for multiple side gigs.

For the record, I don't really want/need multiple solo 401ks, and am aware that the same contribution limits apply. I just thought that I was required to maintain separate ones since my lines of self employment don't really have any overlap.

The comment about hobby income is a smart one. I fully intend to be turning a profit in both these areas, so that shouldn't be an issue!

I'll see what others say, but looks like so far I should be telling Vanguard to cancel my second solo 401k application and let me just use the first one for all of my self-employed income.

Thanks all!

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neurosphere
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by neurosphere » Thu Oct 12, 2017 11:14 am

Spirit Rider wrote:
Thu Oct 12, 2017 9:54 am
Taxation of multiple sole proprietor businesses and employer retirement plans for multiple sole proprietor businesses can be confusing.
I'm hoping the OP's question is sufficiently answered and I can ask some related questions. I need to do my own homework, and also talk to Fidelity for some guidance, but thought I'd start here first.

-- Many years ago I started Business A as a sole proprietor, with its own EIN and a solo 401k. My wife and I were participants/employees (wife did some scheduling, and admin work)".
--Later I started Business B as an LLC with a new EIN, taxed as sole proprietor. Not profitable until last year.
-- I no longer wish to do any medical consulting (A). "A" will not have any income this year, but in the future, who knows? My wife is no longer an employee (didn't do enough after the first year to count as an employee)
-- But business B has the potential to become a "substantial" business, equal to my W2 job. It's currently profitable.

I'm wondering what my solo 401k options are.

Questions.
-- Do I keep the Business A 401k, and open another business B 401k? What determines whether business A is "done" or not? Can I keep the 401k open indefinitely despite no income (after all, I may indeed re-start consulting at any time).
-- If I close the 401k for A, and start a 401k for B, I assume I can rollover the assets from one to the other (Fidelity allows incoming rollovers). But then what happens to my wife's account? Can she keep her assets in the "closed" 401k plan (I assume not) I'm sure the plan rules say what must happen.

This is what makes the most logical sense to me:
Terminate Business A 401k and start a new solo 401k for business B. Rollover my wife's 401k into her employer plan, and rollover 401k "A" into "B". In the future, if business A gain has any earnings/profits, fine, I don't have to make profit sharing contributions.
[Edited to add that I called Fidelity and the CSR agreed that terminating 401k A and opening 401k B, then doing rollovers for my wife and me would be a good way to do it].

Thoughts? But I think that writing this out has allowed me to come up with the answer. :D

Spirit Rider
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by Spirit Rider » Thu Oct 12, 2017 3:25 pm

Not wanting to disagree with a Fidelity CSR, because they are usually very good. However, I don't believe they gave you the best option.

I don't believe there is any reason to terminate SE 401k plan "1" and adopt SE 401k plan "2" (plans are usually numbered). As you noted you will have to rollover the assets, but you will also have to file a final Form 5500-EZ. Seems like a lot of work and I believe unnecessary. The IRS allows multi-employer 401k plans.

The IRS considers a sole proprietor to exist as a business until the sole proprietor takes a pro-active step to terminate it or dies. The IRS considers a 401k plan to be permanent, they do not want them to be terminated and a new one adopted unless absolutely necessary. Also, I don't know if under controlled group rules, you might be subject to the successor plan rule, which would require you to wait a full year before adopting a new 401k

Fidelity allows multi-employer SE 401k plans. I believe your best option is to amend SE 401k plan "1" to a multi-employer plan with the added LLC by submitting an amended Fidelity "Self-Employed 401(k) Adoption Agreement"
  1. 1. Plan Information
    1. The same as the most recent Adoption Agreement
    2. The same as the most recent Adoption Agreement
    3. The same as the most recent Adoption Agreement
    4. Plan Status and Effective Date:
      1. Do not check *** New Plan Effective Date *** or enter date ***
      2. Amendment Effective Date: Check box and enter effective date (can be as early as 1/1/2017).
        1. Check an amendment and restatement of a Basic Plan Document
        2. Do not check *** an amendment and restatement from another plan document *** or enter date ***
  2. Employer
    1. The same as the most recent Adoption Agreement
    2. *** Add the new employer as an affiliated employer ***, the whole reason we are here.
  3. The same as the most recent Adoption Agreement
  4. The same as the most recent Adoption Agreement
Note: The statement; "The same as the most recent Adoption Agreement" was for guidance, nothing prevents you from changing optional items in 3&4.

You should double check with Fidelity and maybe even escalate it to a supervisor. Amended plans, certainly for this purpose is probably a rare occurrence.

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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by neurosphere » Thu Oct 12, 2017 3:46 pm

Spirit Rider wrote:
Thu Oct 12, 2017 3:25 pm
Not wanting to disagree with a Fidelity CSR, because they are usually very good. However, I don't believe they gave you the best option.

I don't believe there is any reason to terminate SE 401k plan "1" and adopt SE 401k plan "2" (plans are usually numbered). As you noted you will have to rollover the assets, but you will also have to file a final Form 5500-EZ. Seems like a lot of work and I believe unnecessary. The IRS allows multi-employer 401k plans.
Spirit Rider, you sure do know your stuff and you are huge asset to BH (and should list you on the BH balance sheet, were they to have one)!

This concept of a multi-employer plan is new to me. I had assumed that I essentially had two businesses which could not be "combined" for 401k purposes, based solely on my assumption that two EINs (and one business which is structured as an LLC) made these businesses very "different".

But this is where a multi-employer plan would (might?) come in!

-- When you mention that my sole-proprietorship exists exists indefinitely (business A, from which I don't anticipate any income anytime soon), it seems like I'm under no obligation to close or terminate either the business or its associated 401k. So it doesn't matter if I have no income for a while (or ever)?
-- If business A no longer considers my wife an employee, she could still rollover her account to another employer?
-- Seems strange that Fidelity would allow this, and it seems somewhat over my head due to my unfamiliarity with the logistics...
-- Would I need/want to get a determination letter from the IRS or anything like that? https://www.irs.gov/retirement-plans/re ... oyer-plans
-- It seems like filing the annual 5500 might be complicated if there are two employers, an amended plan, etc. Will have to research.

Thanks, gonna do some reading! And call Fidelity again... :D

STK

P.S. It seems there is a difference between a "multiemployer plan" and a "multiple employer plan". I assume what you are suggesting is actually a multiple employer plan. https://www.irs.gov/irm/part4/irm_04-072-014
A Multiemployer Plan is a plan maintained pursuant to one or more CBAs and has more than one employer required to contribute to the plan. See IRC 414(f).
A multiemployer plan is not the same as a multiple employer plan. Although both plans have more than one employer making contributions to the plan, multiemployer plan contributions, as well as other benefits, rights and features, were negotiated during the CBA [collective bargaining agreement] process.
Note:
A CBA will not be present in a multiple employer plan.
-- Real name: Sotirios Keros. If you have to ask "Is a Target Retirement fund right for me?", the answer is yes.

Spirit Rider
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by Spirit Rider » Thu Oct 12, 2017 4:20 pm

Yes, if your wife is "separated" from employment. then she is eligible to do a rollover to any eligible plan. It might be better to actually have either a "your services are no longer required letter" from the business to her or a resignation letter from her to the business.

Yes, it looks like I misspoke. Now I'm not even sure if it is really a "multiple employer" plan. Maybe it is a little more detailed, a "multiple affiliated employer" plan, which because of controlled group rules is really considered a one employer one-participant 401k plan.

Let me know what Fidelity says.

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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by DavidRoseMountain » Thu Oct 12, 2017 10:10 pm

Spirit Rider wrote:
Thu Oct 12, 2017 9:54 am
Taxation of multiple sole proprietor businesses and employer retirement plans for multiple sole proprietor businesses can be confusing.

The IRS prefers multiple sole proprietorships to have the same EIN. If there is minor income from one or more Principal Business or Professional Activities than an activity with major income, you can file everything on one Schedule C under the primary activity code.
I can breathe a sigh of relief because that's what I have been doing.

LeeMKE
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Re: Two Solo 401Ks for self under one EIN? (both sole proprietorships)

Post by LeeMKE » Thu Oct 12, 2017 11:52 pm

+1 SpiritRider

I was audited by the IRS during a period when I had multiple gigs. I was nervous they would object to my bundling all of the gigs into one Schedule C. But instead they preferred that I did that, even though it made for a messy audit, having expenses that didn't seem to go together (because they didn't). And yup, the retirement contributions are attributable to the individual, not the business, so no double-dipping is possible/allowed.
The mightiest Oak is just a nut who stayed the course.

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