solo401(k) & 72t SEPP

You are here:
< Back

L1: solo401(k) & 72t SEPPI am self-employed and am thinking of setting up a solo401(k). Ihave a 401(k) account with a previous employer that I will be taking a lump sum distribution from. I know I can roll this over to an IRA and take 72t (SEPP) distribution to avoid the 10%excise tax. However,could I roll the money into my solo401(k), instead of the IRA,and take the SEPP from there (assuming the plan document permits)? I would trackmoney sources (e.g. pre-tax, nonelective & rollover) separately. While new pre-tax and non-elective contributions would be permitted,rollover contributions (after the intial deposit) would not.
My concern is that by being self-employed I may loose the excise tax exceptionfor SEPPdistributionsfrom qualified plans commencing after separation from service. Whileinsubstance thiswould not appear tobean issue,since I built theaccount up with my prior employer,in form, it may be? If it is, could I solve the problems by (1) rolling the money into an IRA first, (2) commencing SEPP distribution within the IRA, and (3)rollingthe IRA over into my solo401(k) after the SEPP havecommenced?2004-11-17 11:38, By: Tim, IP: [207.89.155.82]

L2: solo401(k) & 72t SEPPHello Tim:
I have to admit that I have not looked closely at any solo 401(k) plan documents; so my remarks are off the cuff.
A solo 401(k) is still a 401(k) qualified plan just like any other 401(k) plan. As a general rule 401(k) plans statutorily prohibit in-service distributions while still employed which you would be. In fact, one of the very things RR 2002-62 was drafted to defeat was taxpayers who had a SEPP plan going; got re-employed; and then attempted to roll their IRA into the new employers plan therefore using the new plan as a statutory blocking mechanism; in this case to actually stop the SEPP distributions. Further, you will run inot all kinds of account co-mingling problems in future years.
As a result, I would not roll the old 401(k) into the solo; instead I would roll it over to an IRA, start your SEPP plan and be done with it & hold any assets contributed to the solo separate and for future use.
This also raises an interesting side topic of a self-employed person with a solo 401(k): when do you separate service??? I haven’t read any guidelines to date and this raises a perplexing problem. I would think that if your self-employed endeavors are of any magnitude, you would be much better served by incorporating (not that hard to do) and have the corporate adopt a profit-sharing plan (which gets you to the same place). Then, at its leisure, the corporation can periodically terminate its porfit sharing plan; terminate you as an employee and distribute plan assets to your rollover IRA as suits your needs.
TheBadger
wjstecker@wispertel.net
2004-11-17 12:28, By: TheBadger, IP: [66.250.23.23]

L2: solo401(k) & 72t SEPPThanks for the reply Badger!There is no problem taking distros from a 401(k) rollover account. Plans permit participants to do thisall the time. The withdrawl limitations are mainly relatedto pre-tax contributionswhereyou canstill get thesecontributions (no earnings) via ahardship distro. As for mixing money typesthis is no problem either,qualified plans account fordifferent money sourcesall the time.
For reasons I won’t go intoI’d like to roll my account into into mysolo401(k) and not an IRA. I would not stopSEPP distros if I did this. My questionstill is can I continue the SEPP distros in my solo401(k) or, for that matter, set it up initiallyin the rollover account? It seems like I should be able to do this because I would be in essentially the same position (72t wise) as if it was in the IRA.2004-11-17 16:31, By: Tim, IP: [207.89.155.82]

L2: solo401(k) & 72t SEPPHello Tim:
You peaked my interest so I did a quick scan/review of Fidelity’s & Vanguard’s prototype plan documents for Solo 401(k)s. Both plans prohibit what you intend to do. I am not necessarily saying they should prohibit it; just thant they do.
I can see further difficulties with the IRS in that your intended course of action runs against previous pronouncements by the IRS; however, admittedly these pronouncements typically had a different target.
In summary, I think we have a theory vs. practice issue here. In theory I agree with you; in practice some one is going to say no. If this is really important to you, I suggest you get a PLR first.
TheBadger
wjstecker@wispertel.net
2004-11-17 18:03, By: TheBadger, IP: [66.250.23.23]

L2: solo401(k) & 72t SEPPThanks again. I’m not surprised the Vanguard andFidelity prototype docs don’t have a SEPP rollover account feature. I’ll check with Sungard-Corbel on theirplan. I was planning on using their’sbecause it’s a Volume Submitter type which generallprovides more flexability and features then a standardized/non-standardized prototype doc.2004-11-17 18:36, By: Tim, IP: [207.89.155.80]

L2: solo401(k) & 72t SEPP
Good luck. I”ve used the Sunguard-Corbel documents for years and they are pretty ”vanilla” unless your attorney adds a lot of language to the plan. I guess what it really comes down to is th emoney that you are willing to spend and the risk that you are willing to assume. 2004-11-17 19:46, By: Gfw, IP: [172.16.1.72]

L2: solo401(k) & 72t SEPPI have two points about the Solo K-plan based on my research to start offering them to my self-employed clients. These points were “bubble busters” for me and you’ll probably agree.
First off, the Solo K is NOT and ERISA Plan so there is no creditor protection which is a real bummer.
Second item isa limit: Reporting is “simple” until you hit $100,000 in the plan. After this point it’s Form 5500 time. Now at this point there are some exceptions that make life a little easier but I’m not versed completely and am continuing my reserach.
Jim2004-11-18 10:58, By: Jim, IP: [68.1.157.228]

L2: solo401(k) & 72t SEPPHello Jim:
I certainly agree with your 2nd point; 5500 are a real pain in the butt. How did you come to the conclusion that a solo 401(k) is not an ERISA qualified plan & therefore is afforded no protection from creditors? I read several sets of model documents & kinda came to a different conclusion.
TheBadger
wjstecker@wispertel.net
2004-11-18 12:09, By: TheBadger, IP: [66.250.23.22]

L2: solo401(k) & 72t SEPPHi Bill:
My information about the Solo K comes from briefings by a couple of reps fromproviders of these plans, and to my dismay they all have the same story. In the past their info has been reliable. I was not happy to hear about these two items since I was looking forward to combining my SEP & IRA’s with my annual contributions. Admittedly I haven’t completed the total “Due Dilligence” to be ready to offer these plans to clients but will be getting on with that task in ernest over the holidays. Hopefully these reps were wrong but I tend to believe they may be right. The $100k threshold seems consistent between sponsors and they did talk about some way to mitigate the 5500, but I didn’t understand that aspect. I’ll get more info and advise.
Thanks for your inputs.
Jim2004-11-18 14:03, By: Jim, IP: [68.1.157.228]

L2: solo401(k) & 72t SEPPHello Jim:
Here is some additional info:
IRC 401(a); and by linkage 401(k) & 403(b) qualified plans have always required the annual submission of a tax return; e.g. Form 5500 (of which there are several types). The current threshold is $100k of assets in the plan which was upped from $25k (I think) a couple of years ago. As a cute strategy; one might adopt this plan & wait until assets get over $100k and then two more years (when the full 5500 is due which is the real bear) and then terminate the plan before being required to file a full 5500.
Regards asset attachment (typically a bankruptcy issue); it is my understanding, again depending on state, that 401(a) qualified plan assets are not attachable but that 408(a) & 408A assets; e.g. IRAs are attachable. Now, maybe my understanding is incorrect; however, everything I have read so far says to me that a solo 401(k) plan is a 401(a) qualified plan.
Regards
TheBadger
wjstecker@wispertel.net
P.S. Let me know what you find out.
2004-11-18 14:11, By: TheBadger, IP: [66.250.23.22]

L2: solo401(k) & 72t SEPPBill:
There’s a good rule in this business … keep asking the question until you get the answer you want, and I feel better now.
Just talked with another provider and got the following:
Solo K is an ERISA plan but the creditor protection issue is state specific. Anybody know about Georgia?
When the $100k threshhold is crossed, Form 5500-EZ is required. Guess this is better than the full-blown document.
Employees under age 21 and who work less than 1,000 hoursdon’t have to be covered so conversion to the full K-plan can be delayed.
Jim2004-11-18 15:22, By: Jim, IP: [68.1.157.228]

L2: solo401(k) & 72t SEPPJim,
The providers your talking to are all wrong. A solo401(k) is without a doubt an ERISA plan. As such it must have anti-alienation languagewithin the document prohibiting attachment of funds bycreditors or assignment to anyone else. Additionally,as an ERISA plan it can never bepreempted by state law (e.g.state bankruptcy laws).
-Tim-2004-11-19 05:56, By: Tim, IP: [207.89.155.80]