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Any urgency to complete amendment of solo 401k if employee doesn't start until 2022

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  • Any urgency to complete amendment of solo 401k if employee doesn't start until 2022

    Hello,

    My wife is a self employed physician who has been using a solo 401K with a Roth component and profit sharing plan for the last two years. She hasn't had any employees during this time period. She has decided to hire a nurse who will begin employment on 1/3/2022. Can the process of amending the existing plan documents to a 3% safe harbor plan with profit sharing occur in 2022? Or does she have to have the amended safe harbor plan in place by 12/31/2021?

    I reached out to a 401K plan administrator that I've had experience with in the past when I was an officer of a medium sized physician group, and they have stated the plan must be amended prior to 2022. This doesn't seem logical to me. My flat fee advisor has told me he doesn't believe this is correct, and that we can proceed in a controlled methodical fashion to amend the documents next year. He admits this isn't his area of expertise, and is also seeking guidance from a third party administrator he worked with in the past (Employee Fiduciary I believe)

    Thanks in advance to the professionals on this board who volunteer their expertise. The knowledge imparted will help us better evaluate prospective TPA's.


  • #2
    If the current one-participant 401k has elected or amends* to elect employee eligibility restrictions of one (1) year of service defined as 1,000 hours/year by 12/31/21. The employee will not become an eligible employee until 1/3/23 and the plan will not have to be amended to an ERISA plan also until 2023.

    If employee eligibility restrictions are not in place before the employee starts, the owner should not make any contributions for the 2022 tax year until an ERISA plan is adopted and any notice requirement are met.

    Bottom line: The plan does not have to be amended to an ERISA 401k in 2022, if you already have or can amend to elect employee eligibility restrictions by 12/31/21. Otherwise your one-participant 401k is non-compliant on 1/3/22 unless you terminate the one-participant 401k or amend to an ERISA plan during 2022.

    *Vanguard's Individual 401k does not allow employee eligibility restrictions, If that is the current plan, it will have to be amended to a different one-participant 401k provider and the employee eligibility restrictions elected by 12/31/21.
    Last edited by spiritrider; 12-21-2021, 03:27 PM.

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    • #3
      Thank you Spiritrider!

      The current solo 401K plan is with TDA. Their forms do indicate that employee eligibility restrictions are allowed. I will work to elect the employee eligibility restrictions prior to 12/31/2021. We will then take our time to amend the plan to an ERISA 401K in 2022.

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      • #4
        If you complete the first step, there will be no urgency in 2022. you just want to have the safe harbor 401k in place to meet the notice requirements to be effective 1/1/22. Still I would start not later than 9/1, because it may some time to identify your best option.

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        • #5
          Originally posted by spiritrider View Post
          If you complete the first step, there will be no urgency in 2022. you just want to have the safe harbor 401k in place to meet the notice requirements to be effective 1/1/22. Still I would start not later than 9/1, because it may some time to identify your best option.
          There are a number of other provisions to look at such as cross-tested profit sharing and possibly others, so once the employee works 1000 hours in 2023 they are going to be eligible to get whatever other provisions currently allow for. I would review everything and see if it makes sense getting a custom plan document sooner, before they work 1000 hours in 2023, or sometime towards the end of 2022. Also, OP should know that they would be responsible for all of the notices and compliance with a TDA account, including providing enough information for the participant to open their own TDA account and select appropriate investments, etc (and making sure contributions are deposited properly and timely), basically acting as their own TPA/record-keeper/fiduciary all in one. So they might want hire a TPA to do it all for them in 2022 for 2023 so that they can start with a custom plan document for 2023 and so that they can provide all of the required notices once the employee is eligible.
          Kon Litovsky, Principal, Litovsky Asset Management | [email protected] | 401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

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