I have a solo 401k entanglement I inadvertently created and am struggling to figure out how to resolve. At the end of the year around a decade ago I simultaneously opened two 401k plans, one in my own name, one in the name of my LLC that I formed around the same time. The plans were with TDA using their prototype documents. TDA was aware I was opening two plans but did not mention it was problematic. For that year, I contributed to the sole prop plan only because my income was all schedule c. After that year all of my income was through the LLC and I made contributions to the LLC plan only. The point of opening the sole prop plan in addition to the LLC plan was to contribute for that year as I switched to billing under my LLC the following Jan 1 (my cpa gave me bad advice).
I know now that a sole prop and LLC are likely a control group or related employer and that the prototype documents forbid multiple plans. I only discovered this recently. I terminated the sole prop plan several months ago and rolled over the assets (just the contribution from the year it was opened) to an IRA so now I only have the LLC plan.
I am not sure what to do about the operational error that was in place for the better part of the last decade. The plans combined eclipsed $250k a few years back and I did not file 5500-ez then. I am thinking to do the penalty relief program and file for both plans beginning when they eclipsed the threshold together which was two years back. I fear this might result in an audit and risk disqualification but want to file the forms asap for obvious reasons.
I am wondering if I risk disqualification going back ten years and if so if the IRS would then say I should have filed 5500-ez back then because it considers the plan(s) to be retroactively terminated then. Is that possible in which I case should I file for the last ten years for both plans?
Beyond the forms, I am wondering what else I should do. I may close the LLC plan because I am now employed elsewhere but think I’d still be exposed if audited. I don’t know if I did VCP what the fix would be or who would represent me.
I have had trouble finding someone to engage with to help. I have spoken to a few TPA firms from my accountant but they were more interested in having me transfer the surviving plan to them and less focused on the compliance issues. Any referrals to an attorney or a TPA that deals with these kind of compliance issues would be helpful.
Solo 401k Multiple Plans Cleanup
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Solo 401k Multiple Plans Cleanup
Last edited by Imagine382 on Fri Jun 09, 2023 11:38 am, edited 6 times in total.
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Re: Solo 401k Multiple Plans Cleanup
You have two or three issues:Imagine382 wrote: ↑Fri Jun 09, 2023 12:40 am … To be clear I never contributed to both plans same year, the issue is that I didn’t know I should have had one plan.
1) having multiple Solo 401k plans
2) not timely filing an annual Form 5500-EZ for the year(s) in which plan assets at 12/31 were $250k+
3) did you timely file the final Form 5500-EZ for the terminated SP 401k plan?
The issues have penalties and plan disqualification implications. The IRS does have a penalty relief program for certain plan compliance issues. I don’t think this is a DIY fix. Consider contacting a Solo 401k TPA firm to see if they will take this on for a fee. A benefits attorney with 401k experience would be another option.
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Re: Solo 401k Multiple Plans Cleanup
I did not yet file the 5500-EZ for the terminated plan. I am within 7 months and wanted to figure out a full strategy before filing anything. I spoke to two TPA firms and they were not particularly helpful with this and I would have had to transfer my plan to them for them to help at all with the compliance matter. Do you have a benefits attorney you can recommend?
Re: Solo 401k Multiple Plans Cleanup
You have a complex issue. Spirit Rider and Alan S are the experts in this area but I haven't seen anything from Spirit Rider in some time.
Here's a post that is not the same exact issue you have, but similar, with good thoughts, and links to other threads.
viewtopic.php?t=331948
As noted, this may not be best addressed as a DIY issue.
Mike
Here's a post that is not the same exact issue you have, but similar, with good thoughts, and links to other threads.
viewtopic.php?t=331948
As noted, this may not be best addressed as a DIY issue.
Mike
Re: Solo 401k Multiple Plans Cleanup
Are you 59.5 or older? If not, then rolling your assets from your “self” 401k to your IRA may be prohibited. If so, that might mean your “LLC” 401k cannot exist as you would not be allowed to open a 401k within 1 year of terminating an existing 401k.
It may be sufficient to terminate the “LLC” 401k, file all necessary Form 5500s for each plan but as if these were a combined plan and ask for penalty waivers for late filing. But even that is complex and you may need professional advice.
You could start with your CPA. Even though the CPA may have steered you wrong in the past, they may be able to refer you to someone with expertise in the area. In any event, make it a point to have an action plan before the 5500 is due from the terminated “self” 401k and don’t do anything else with either plan until you have such a plan. You are in a hole; it’s time to stop digging.
It may be sufficient to terminate the “LLC” 401k, file all necessary Form 5500s for each plan but as if these were a combined plan and ask for penalty waivers for late filing. But even that is complex and you may need professional advice.
You could start with your CPA. Even though the CPA may have steered you wrong in the past, they may be able to refer you to someone with expertise in the area. In any event, make it a point to have an action plan before the 5500 is due from the terminated “self” 401k and don’t do anything else with either plan until you have such a plan. You are in a hole; it’s time to stop digging.
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Re: Solo 401k Multiple Plans Cleanup
Under 59.5 but these plans were both opened ten years ago. I terminated the sole prop plan recently.
Re: Solo 401k Multiple Plans Cleanup
It may be (or may have been) possible to amend your first solo 401k to include the LLC as an affiliated employer, making it one plan instead of two. This is often the case with controlled groups, but we don't know what your specific prototype plan's document says.Imagine382 wrote: ↑Fri Jun 09, 2023 12:40 am I know now that a sole prop and LLC are likely a control group or related employer and that the prototype documents forbid multiple plans. I only discovered this recently. I terminated the sole prop plan and rolled over the assets (just the contribution from the year it was opened) to an IRA so now I only have the LLC plan.
I think this might be the right approach, but agree with all the previous posters that this is probably not a DIY project at this point.