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Plan Updates

Part-time employees and your Solo 401k

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If you have part-time employee(s) that meet the following criteria, you will be ineligible for your Solo 401k per the SECURE Act:

  • At least 500 hours per year, and
  • For 2 or 3 consecutive years, starting from January 1, 2021

The above criteria does not apply to:

  • You
  • Your spouse, if employed by the business
  • Independent contractors (1099s), if paid by the business

However, if you have part-time employee(s) in your businesses that meet the above criteria, they will become eligible for the plan in 2024 or 2025. And this renders you ineligible for your Solo 401k, since it is designed for the owners only.

If you have any part-time employee(s), please do the following:

  • Check their hours

Starting from January 1, 2021, have they worked at least 500 hours for 2 or 3 consecutive years? 

Part-time employee(s) who have worked at least 500 hours for 3 consecutive years become eligible for the plan in 2024. Those who have worked at least 500 hours for 2 consecutive years become eligible for the plan in 2025. 

If they have worked and will remain under 500 hours, you remain eligible for your Solo 401k. But make sure that your plan documents have the service requirement described below.

  • Check your plan documents

If you have any part-time employee(s), you should have a service requirement checked in your plan documents.

Review your Post PPA “Defined Contribution Adoption Agreement”, page 5. C4.b should be checked as below:

  • Notify Sense Financial Services to update or close the plan, if needed

If your part-time employee(s) have worked and will remain under 500 hours, you are still eligible for your plan, but your plan documents should have C.4.b checked as above to exclude the part-time employee(s).

If your part-time employee(s) have worked at least 500 hours for 2-3 consecutive years, you will need to close your plan by 2024. Notify Sense Financial to do so immediately.

For more information on terminating the plan:

How do I terminate my Solo 401k plan?

Is my Solo 401k plan covered under ERISA?

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Your 401(k) plan is a Qualified Plan. The DOL regulations provide that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA. Pursuant to Department of Labor Regulations 2510.3-3(c). However, even though a solo 401(k) plan is not subject to Title 1 of ERISA, the ERISA rules are still looked at as a reference because a solo 401(k) Plan is still a qualified retirement plan. 401(k) generally has greater protection than an IRA.

IRS Reminds Plan Sponsors of Plan Restatement Deadline

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April 30, 2016, is the deadline for employers using pre-approved retirement plan documents to sign an updated version of their 401(k), profit-sharing or other defined contribution retirement plans.

Retirement plan documents must be revised when the law changes. In an updated web page, the Internal Revenue Service (IRS) reminds plan sponsors that document providers who offer pre-approved plans update the plan in its entirety once every six years and request a new opinion/advisory letter from the agency. The IRS generally approves all updated defined contribution plans at the same time. Most opinion/advisory letters for the latest round of pre-approved defined contribution plans were issued on March 31, 2014. Employers have two years, until April 30, 2016, to adopt these updated plans.

After April 30, 2016, if a plan sponsor hasn’t adopted a restated plan, the plan does not comply with the tax laws and may be ineligible for tax benefits.

Providers should have sent plan sponsors a revised plan document, approved by the IRS, which complies with the Pension Protection Act of 2006 (PPA) and other law changes listed on the 2010 Cumulative List of Changes in Retirement Plan Qualification Requirements. Even if plan sponsors made amendments to your plan to reflect these laws as they became effective (interim amendments), they are still required to adopt a PPA plan document.

Most employers don't need to apply for a separate IRS determination letter for a pre-approved plan, and a plan sponsor who adopts a master & prototype plan (standardized or non-standardized) may not apply for its own determination letter. Instead, the plan sponsor should rely on the approval letter issued to the document provider.

What happens if sponsoring company shuts down

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What are the options for my Solo 401K plan if the company that sponsors the plan shuts down (I am no longer self-employed)?

Answer:

A 401k plan is an employer-sponsored plan, therefore in order to maintain your Qualified Retirement Plan, you must maintain a small business or some sort of self-employment activity in some legitimate form. If you shut down your current entity, but continue another type of self-employment activity and make earnings then we can amend the plan to reflect the change.

If, let's say, you quit all of your self-employment activity and get a full-time job, and that is the only income you have (W2 wages working for someone), then the Qualified Plan must be terminated. You will then have the option of rolling over your account into an IRA.

What is the six-year restatement period?

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In the past the restatement cycles have been somewhat disorganized. The IRS has now created a systematic six-year cycle. Pre-approved plans must be restated every six years to incorporate the interim amendments and any discretionary amendments that have been adopted since the last restatement. At the end of this six-year period, there will be a two- year window in which to update the plan document.

What is a pre-approved plan?

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A pre-approved plan is one that the IRS has reviewed and approved all of the options that are available. The IRS issues an advisory or opinion letter as evidence of the plan's pre-approved status.

All employers who adopt a pre-approved plan covered by the IRS letter are entitled to rely on the approval letter issued at the “global” level without applying for their own, individual determination letter.

Our plan documents include the IRS letter.  It is typically sent as a link in the email which accompanies the plan documents.

Why do I need to keep amending my plan?

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Qualified plans are governed by a set of Federal laws enacted by Congress and regulated by various agencies. The IRS is responsible for oversight of the tax aspects of retirement plans, and the DOL is responsible for reporting, disclosure and fiduciary aspects of retirement plans.  The result is a continual change in the laws due to changing legislation and regulations issued to oversee compliance with the laws. As a result, there are frequent changes in the law but in most cases they are not major ones. A requirement to have a qualified retirement plan is that it must be in writing. This means that as the laws change, your plan must generally be amended to reflect the changes.