Setup two individual 401k (etrade and vanguard) how to rectify?

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Topic Author
CBrun
Posts: 7
Joined: Sat Mar 19, 2022 11:27 pm

Setup two individual 401k (etrade and vanguard) how to rectify?

Post by CBrun »

Hi there!

I messed up sometime ago with my individual 401k plans and I'm only now figuring this out from some reading from Spirit Rider / White Coat Investor. I'd like to know if anyone knows how I could go about rectifying this and also trying to make sure that my accounts aren't disqualified + I can keep the tax benefits for the years. Not sure if all of that is possible, but its worth a shot.

Here's what I did. I setup an etrade individual 401k for my business back in 2020. I contributed a few thousand to it, and then was bothered by the interface issues and so on. Stopped contributing in 2020 (I believe, would have to double check this)

Fast forward to 2021, I opened a individual 401k at Vanguard and then 'closed' my account at ETrade -- what I did not know at the time was that 'closing the account' was not terminating my 401k plan, so that plan is still in effect and at this point I had two accounts setup. When I closed the roth 401k plan at ETrade I then moved the assets into my Roth 401k at Vanguard. It was coded over as a "2021 EMPLOYEE ASSET TRNSFR" so its possible all is well.

For the entire year of 2021 and 2022 I've now contributed to the Vanguard plan, assets are around 50k. Not sure what to do to rectify this or if there's a chance things are not as bad as it seems
HomeStretch
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Joined: Thu Dec 27, 2018 2:06 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by HomeStretch »

You have an issue which you should correct before the IRS catches it. In retrospect, your existing plan should have been amended to Vanguard’s plan and the plan assets transferred directly from ETrade to Vanguard before making an initial Vanguard plan contribution.

When you set up the Vanguard Solo 401k plan in 2021, did you check off on the adoption agreement that it was a new plan (with a 1/1/2021 effective date and 002 plan sequence #) or did you check off that you were amending an existing plan (with the ETrade plan’s original effective date of 1/1/2020 and 001 sequence #)?

More importantly, did the Vanguard plan receive all transferred plan assets from ETrade (zeroing out the ETrade plan balance) before you made any new contributions to the Vanguard plan? Or did you have a balance in both plans at any point at the same time?

If you transferred all ETrade plan assets to the Vanguard plan before making an initial contribution to the Vanguard plan, ask Vanguard if you can correct your plan adoption agreement (to show it as an amended plan using the ETrade plan’s sequence # and original adoption date) as that may be enough to resolve your issue.

If you had $ in both plans at the same time, you have a more serious plan non-compliance issue. Your issue may be covered by the IRS program for 1st time offenders with reduced penalties if you voluntarily correct this through the program before the IRS catches your issue. I don’t know if you will receive sufficient forum feedback to handle this. You may want to seek professional assistance with this from a benefits attorney or perhaps a larger third-party plan administrator of 401k plans might offer this assistance.
toddthebod
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Joined: Wed May 18, 2022 12:42 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by toddthebod »

HomeStretch wrote: Tue Aug 09, 2022 6:59 am
If you transferred all ETrade plan assets to the Vanguard plan before making an initial contribution to the Vanguard plan, ask Vanguard if you can correct your plan adoption agreement (to show it as an amended plan using the ETrade plan’s sequence # and original adoption date) as that may be enough to resolve your issue.
This is what I had to do, OP, only it was E*Trade to Schwab. I had filled out the Schwab paperwork for a new plan, then transferred the assets, then learned why that was incorrect on this forum. I reached out to Schwab, they had me fill out a new adoption agreement and include a signed letter explaining why, and then they told me everything was taken care of.

Side note, all I had to do was email my personal Schwab rep, and she looked into it for me, got back to me with what they wanted, and then called me when everything was taken care of. I'll be impressed if you get the same level of service at Vanguard!

Side side note: there are probably thousands of people out there that have made the same mistake, and I haven't heard of a rash of IRS audits of solo 401k plans, so you are unlikely to get in trouble. I'm assuming you didn't have $250,000 in the account and were filing forms 5500, and filed a final form for the E*Trade plan, because then you'll have a problem with the succession rule.
Topic Author
CBrun
Posts: 7
Joined: Sat Mar 19, 2022 11:27 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by CBrun »

HomeStretch wrote: Tue Aug 09, 2022 6:59 am You have an issue which you should correct before the IRS catches it. In retrospect, your existing plan should have been amended to Vanguard’s plan and the plan assets transferred directly from ETrade to Vanguard before making an initial Vanguard plan contribution.

When you set up the Vanguard Solo 401k plan in 2021, did you check off on the adoption agreement that it was a new plan (with a 1/1/2021 effective date and 002 plan sequence #) or did you check off that you were amending an existing plan (with the ETrade plan’s original effective date of 1/1/2020 and 001 sequence #)?

More importantly, did the Vanguard plan receive all transferred plan assets from ETrade (zeroing out the ETrade plan balance) before you made any new contributions to the Vanguard plan? Or did you have a balance in both plans at any point at the same time?

If you transferred all ETrade plan assets to the Vanguard plan before making an initial contribution to the Vanguard plan, ask Vanguard if you can correct your plan adoption agreement (to show it as an amended plan using the ETrade plan’s sequence # and original adoption date) as that may be enough to resolve your issue.

If you had $ in both plans at the same time, you have a more serious plan non-compliance issue. Your issue may be covered by the IRS program for 1st time offenders with reduced penalties if you voluntarily correct this through the program before the IRS catches your issue. I don’t know if you will receive sufficient forum feedback to handle this. You may want to seek professional assistance with this from a benefits attorney or perhaps a larger third-party plan administrator of 401k plans might offer this assistance.
Got it, thank you HomeStretch for the information here I really appreciate it.

When the Vanguard Solo 401k plan was setup I checked that it was a new plan. I also just spoke to them today and they said this is what people typically do when moving accounts to them, and they didn't see an issue with that. Honestly I'm not very happy with the info they've provided because I don't think its correct.

Looking back at my records, I had begun contributing to Vanguard BEFORE the ETrade plan balance was zeroed out -- I think it was in the middle of transferring, but there was still a balance in both for a few months.

I'm thinking that's going to be the largest part of this issue. I'm thinking of reaching out to people at Employee Fiduciary to move the plan over to them, and have them help rectify any issues that this has caused.
toddthebod wrote: Tue Aug 09, 2022 8:32 am
HomeStretch wrote: Tue Aug 09, 2022 6:59 am
If you transferred all ETrade plan assets to the Vanguard plan before making an initial contribution to the Vanguard plan, ask Vanguard if you can correct your plan adoption agreement (to show it as an amended plan using the ETrade plan’s sequence # and original adoption date) as that may be enough to resolve your issue.
This is what I had to do, OP, only it was E*Trade to Schwab. I had filled out the Schwab paperwork for a new plan, then transferred the assets, then learned why that was incorrect on this forum. I reached out to Schwab, they had me fill out a new adoption agreement and include a signed letter explaining why, and then they told me everything was taken care of.

Side note, all I had to do was email my personal Schwab rep, and she looked into it for me, got back to me with what they wanted, and then called me when everything was taken care of. I'll be impressed if you get the same level of service at Vanguard!

Side side note: there are probably thousands of people out there that have made the same mistake, and I haven't heard of a rash of IRS audits of solo 401k plans, so you are unlikely to get in trouble. I'm assuming you didn't have $250,000 in the account and were filing forms 5500, and filed a final form for the E*Trade plan, because then you'll have a problem with the succession rule.
Yeah I just spoke to Vanguard and they didn't really know much of what I was talking about, and they told me what I had done was fine and that I was in compliance from what they had seen. The first guy I had on the phone was more interested in what I did as a self employed person and congratulating me on that and so on..... sigh

Totally thinking there's lots of people out there with the same mistake. Agreed on that side of things

When it comes to the "Assuming you didn't have 250k in the plans and were filling forms 5500, and filed a final form for the ETrade plan" I was not filling form 5500 b/c the account did not hit 250k in assets nor am I sure that the ETrade plan was closed. I moved the assets over to zero it out, but not sure if that means it was closed / terminated.

Did you file form 5500 and file a final form with the plan? Or was this just related to the 250k or above side of things?
Topic Author
CBrun
Posts: 7
Joined: Sat Mar 19, 2022 11:27 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by CBrun »

As one helpful update/reprieve. When I try to log in to my ETrade account, it says the following.

"Closed Account Access to Tax & Account Records
As a former E*TRADE Securities or E*TRADE Bank customer whose account(s) are closed, your session access is limited to:"

Then it just lists out tax records and statements that I can access. I'm assuming (still want to verify) that this means my account is closed.
HomeStretch
Posts: 11415
Joined: Thu Dec 27, 2018 2:06 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by HomeStretch »

If you don’t have a balance in your ETrade Solo 401k plan account then there’s nothing more you need to do with ETrade.

I think the advice about it being a new plan that you received from Vanguard is incorrect.

As you had balances (i.e. plan assets) at both Vanguard and ETrade at the same time, I agree that this is your main issue. I also agree with talking to Employee Fiduciary to get some expert help. Get copies/PDFs of your Vanguard and ETrade adoption agreements that you completed/signed as EF should want to see them.

If you are going to use a Solo 401k plan, read the instructions to Form 5500-EZ so you are aware of the plan filing requirement if your plan assets are $250k+ at December 31 or if you terminate a plan. Keep in mind that you did not “terminate” your ETrade Solo 401k plan so don’t try to file a (late) Form 5500-EZ for an ETrade plan termination.

You may also want to read up on the IRS voluntary correction programs for qualified benefit plans to see if they help in your situation.

Best of luck. Please post back on your resolution to this issue as it may help others.
Topic Author
CBrun
Posts: 7
Joined: Sat Mar 19, 2022 11:27 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by CBrun »

HomeStretch wrote: Tue Aug 09, 2022 1:28 pm If you don’t have a balance in your ETrade Solo 401k plan account then there’s nothing more you need to do with ETrade.

I think the advice about it being a new plan that you received from Vanguard is incorrect.

As you had balances (i.e. plan assets) at both Vanguard and ETrade at the same time, I agree that this is your main issue. I also agree with talking to Employee Fiduciary to get some expert help. Get copies/PDFs of your Vanguard and ETrade adoption agreements that you completed/signed as EF should want to see them.

If you are going to use a Solo 401k plan, read the instructions to Form 5500-EZ so you are aware of the plan filing requirement if your plan assets are $250k+ at December 31 or if you terminate a plan. Keep in mind that you did not “terminate” your ETrade Solo 401k plan so don’t try to file a (late) Form 5500-EZ for an ETrade plan termination.

You may also want to read up on the IRS voluntary correction programs for qualified benefit plans to see if they help in your situation.

Best of luck. Please post back on your resolution to this issue as it may help others.

Hey HomeStretch, thanks again for all of the helpful info.

I'll move forward with talking to Employee Fiduciary and then I'll update this post once I've chatted with them.

Thanks again!
toddthebod
Posts: 5735
Joined: Wed May 18, 2022 12:42 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by toddthebod »

CBrun wrote: Tue Aug 09, 2022 11:00 am
HomeStretch wrote: Tue Aug 09, 2022 6:59 am You have an issue which you should correct before the IRS catches it. In retrospect, your existing plan should have been amended to Vanguard’s plan and the plan assets transferred directly from ETrade to Vanguard before making an initial Vanguard plan contribution.

When you set up the Vanguard Solo 401k plan in 2021, did you check off on the adoption agreement that it was a new plan (with a 1/1/2021 effective date and 002 plan sequence #) or did you check off that you were amending an existing plan (with the ETrade plan’s original effective date of 1/1/2020 and 001 sequence #)?

More importantly, did the Vanguard plan receive all transferred plan assets from ETrade (zeroing out the ETrade plan balance) before you made any new contributions to the Vanguard plan? Or did you have a balance in both plans at any point at the same time?

If you transferred all ETrade plan assets to the Vanguard plan before making an initial contribution to the Vanguard plan, ask Vanguard if you can correct your plan adoption agreement (to show it as an amended plan using the ETrade plan’s sequence # and original adoption date) as that may be enough to resolve your issue.

If you had $ in both plans at the same time, you have a more serious plan non-compliance issue. Your issue may be covered by the IRS program for 1st time offenders with reduced penalties if you voluntarily correct this through the program before the IRS catches your issue. I don’t know if you will receive sufficient forum feedback to handle this. You may want to seek professional assistance with this from a benefits attorney or perhaps a larger third-party plan administrator of 401k plans might offer this assistance.
Got it, thank you HomeStretch for the information here I really appreciate it.

When the Vanguard Solo 401k plan was setup I checked that it was a new plan. I also just spoke to them today and they said this is what people typically do when moving accounts to them, and they didn't see an issue with that. Honestly I'm not very happy with the info they've provided because I don't think its correct.

Looking back at my records, I had begun contributing to Vanguard BEFORE the ETrade plan balance was zeroed out -- I think it was in the middle of transferring, but there was still a balance in both for a few months.

I'm thinking that's going to be the largest part of this issue. I'm thinking of reaching out to people at Employee Fiduciary to move the plan over to them, and have them help rectify any issues that this has caused.
toddthebod wrote: Tue Aug 09, 2022 8:32 am
HomeStretch wrote: Tue Aug 09, 2022 6:59 am
If you transferred all ETrade plan assets to the Vanguard plan before making an initial contribution to the Vanguard plan, ask Vanguard if you can correct your plan adoption agreement (to show it as an amended plan using the ETrade plan’s sequence # and original adoption date) as that may be enough to resolve your issue.
This is what I had to do, OP, only it was E*Trade to Schwab. I had filled out the Schwab paperwork for a new plan, then transferred the assets, then learned why that was incorrect on this forum. I reached out to Schwab, they had me fill out a new adoption agreement and include a signed letter explaining why, and then they told me everything was taken care of.

Side note, all I had to do was email my personal Schwab rep, and she looked into it for me, got back to me with what they wanted, and then called me when everything was taken care of. I'll be impressed if you get the same level of service at Vanguard!

Side side note: there are probably thousands of people out there that have made the same mistake, and I haven't heard of a rash of IRS audits of solo 401k plans, so you are unlikely to get in trouble. I'm assuming you didn't have $250,000 in the account and were filing forms 5500, and filed a final form for the E*Trade plan, because then you'll have a problem with the succession rule.
Yeah I just spoke to Vanguard and they didn't really know much of what I was talking about, and they told me what I had done was fine and that I was in compliance from what they had seen. The first guy I had on the phone was more interested in what I did as a self employed person and congratulating me on that and so on..... sigh

Totally thinking there's lots of people out there with the same mistake. Agreed on that side of things

When it comes to the "Assuming you didn't have 250k in the plans and were filling forms 5500, and filed a final form for the ETrade plan" I was not filling form 5500 b/c the account did not hit 250k in assets nor am I sure that the ETrade plan was closed. I moved the assets over to zero it out, but not sure if that means it was closed / terminated.

Did you file form 5500 and file a final form with the plan? Or was this just related to the 250k or above side of things?
Yeah, Vanguard is wrong. I assume when you filled out the adoption agreement for Vanguard you put a new effective date and sequence number 002, is that right? In that case, you were either simultaneously maintaining two 401(k) plans, which you cannot do, or you terminated your E*Trade plan prior to adopting a new 401(k) with Vanguard, in which case you both failed to file the proper plan termination form 5500 with the IRS as well as violated the succession rule, which states you cannot open a new plan within 12 months of terminating the prior plan.

The best outcome for you would be if Vanguard would let you file a new adoption agreement to replace the prior one, which is what Schwab allowed me to do. If they won't allow that, I would roll everything over into an IRA, close the 401(k) with Vanguard, and just pretend this whole situation never happened.
HomeStretch
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Joined: Thu Dec 27, 2018 2:06 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by HomeStretch »

Ask Vanguard if they will let you substitute a new adoption agreement, as suggested.

Research/talk to Employee Fiduciary to see if having assets in both plans at the same time is an issue. If that overlap was short or if you didn’t contribute to both plans in the same tax year, you may not have a plan compliance issue. You need an expert to look at your fact set to see if there is a real issue or not.
Topic Author
CBrun
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Joined: Sat Mar 19, 2022 11:27 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by CBrun »

HomeStretch wrote: Tue Aug 09, 2022 6:04 pm Ask Vanguard if they will let you substitute a new adoption agreement, as suggested.

Research/talk to Employee Fiduciary to see if having assets in both plans at the same time is an issue. If that overlap was short or if you didn’t contribute to both plans in the same tax year, you may not have a plan compliance issue. You need an expert to look at your fact set to see if there is a real issue or not.
Got it, I will do both of these items.

What exactly would the new adoption agreement state? Would it just state that this plan was initiated in the yr prior under ETrade and that a transfer took place? From initial email conversations from Employee Fiduicary they're saying that this is not a problem, but I'll be going into more detail in a call tomorrow.
toddthebod wrote:Yeah, Vanguard is wrong. I assume when you filled out the adoption agreement for Vanguard you put a new effective date and sequence number 002, is that right? In that case, you were either simultaneously maintaining two 401(k) plans, which you cannot do, or you terminated your E*Trade plan prior to adopting a new 401(k) with Vanguard, in which case you both failed to file the proper plan termination form 5500 with the IRS as well as violated the succession rule, which states you cannot open a new plan within 12 months of terminating the prior plan.

The best outcome for you would be if Vanguard would let you file a new adoption agreement to replace the prior one, which is what Schwab allowed me to do. If they won't allow that, I would roll everything over into an IRA, close the 401(k) with Vanguard, and just pretend this whole situation never happened.
I was thinking the same thing.

Not fully sure on the sequence number I gave them, I think I may have used 001 again.

I'm going to reach out to Vanguard again. When yours was restated was there anything in particular that should be on the restatement of the adoption agreement?
Topic Author
CBrun
Posts: 7
Joined: Sat Mar 19, 2022 11:27 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by CBrun »

Also ToddTheBod, just one additional question from what you said in the worst case scenario:

If this account was terminated then rolled into a IRA, could I begin a new 401K plan (with employee fiduciary) in 2023 or would I run afoul of the succession rule for this? Just working through the other potential options here.
HomeStretch
Posts: 11415
Joined: Thu Dec 27, 2018 2:06 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by HomeStretch »

CBrun wrote: Tue Aug 09, 2022 7:07 pm What exactly would the new adoption agreement state? Would it just state that this plan was initiated in the yr prior under ETrade and that a transfer took place? From initial email conversations from Employee Fiduicary they're saying that this is not a problem, but I'll be going into more detail in a call tomorrow.
Same plan, just a provider change. So the new substitute adoption agreement at Vanguard should have the option checked to say it is an existing plan (rather than a new plan) and use the same plan name/EIN/employer sponsor name/initial plan adoption date/sequence # (likely 001).

Sounds like you are off to a promising start with EF.
toddthebod
Posts: 5735
Joined: Wed May 18, 2022 12:42 pm

Re: Setup two individual 401k (etrade and vanguard) how to rectify?

Post by toddthebod »

CBrun wrote: Tue Aug 09, 2022 7:21 pm Also ToddTheBod, just one additional question from what you said in the worst case scenario:

If this account was terminated then rolled into a IRA, could I begin a new 401K plan (with employee fiduciary) in 2023 or would I run afoul of the succession rule for this? Just working through the other potential options here.
I honestly don't know how or even if the IRS would find out you had out-of-compliance 401(k)s, and what penalties they might impose. Unfortunately, most 401(k) penalties are geared towards large businesses and can be very, very large. Like hundreds of thousands of dollars. Therefore, I would seek out professional advice (maybe start with a professional third party administrator), or, barring that, move back to an IRA and start fresh with a new EIN and a new initial plan (but wait 12 months just to be extra safe).

But really, don't take my advice. I'm not a professional in this area. I just made the same mistake you did and was trying to share my experience.
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