"Controlled Group" 401k applies to me?

[bobbybee22]

Seeking advice on my current situation.

I have three solo 401k plans from from prior independent contractor jobs: plans A, B, and C (each are under different LLC's). I am now starting a new company (that will have employees besides myself) so I want to start a new 401k plan ... plan D (a new LLC). This will be the only plan that I contribute to henceforth. The 401k administrator company that I contacted said I must rollover my plans A B and C into IRAs. However, I don't really want to do that, just for simplicity.

This 401k company rep said: "The current set up with your existing Solo K’s and the intended new 401k would create an IRS “Controlled Group” of K plans. This means: Common ownership between the 3 Solo K’s and the new 401k requires that they all be aggregated for rules and testing. So all under one ownership umbrella (you)."

Does anyone out there know if this is accurate? If not, what's the best approach to my situation?

[jacoavlu]

you either have a small mess or a big mess

you should have never had 3 plans in the first place. I sure hope you didn’t exceed contribution limits in the past.

[pit.alumni]

The control group and affiliated service group rules can be complicated and I don’t think a forum is the best source of advice. If you screw this up it can be complicated and costly to unwind. I’d find an attorney that specializes in retirement plan law and lay out your situation to them. They may also help you structure your new plan to maximize owner contributions.

[jacoavlu]

while these situations can be complex, in the case of the OP its clear any independent contractor job as in plans A, B, and C are a controlled group. And a wholly owned new company would fall in the same controlled group.

if the OP exceed a single plan contribution limits in the past via plans A, B, and C this is what I would call a big mess, if not then its a small mess

[spiritrider]

jacoavlu is correct on all points.

All businesses 100% owned by a single individual are always a Controlled Group. You were never eligible to have more than a single one-participant 401k plan in the first place.

All businesses should have used the first 401k plan. If you adopted the first one-participant 401k plan at E-Trade, Schwab, TD Ameritrade or Vanguard. All the subsequent affiliated employers were automatically part of the plan. If it was Fidelity, a simple amendment to the adoption agreement would have added the additional affiliated employers.

The new 401k plan administrator is not entirely correct. While it is true that you must terminate 401k plans A, B and C and rollover the assets. Nothing prevents you from doing the rollovers into the new 401k plan. While that will almost certainly make the new 401k plan top heavy, surely you are adopting a safe harbor 401k plan.

[White.Beard.Doc]

I have had access to multiple 401k/403b plans at various times. Some were within the controlled group under my ownership. Others were with my outside employer. What I did was to make sure that I never exceeded the employee contribution limits in any year, when adding up the contributions to all of the plans for that particular year. As far as the controlled group, I only made employer contributions to one of the plans in any given plan year. The pension accountant (third party administrator) signed off on everything we did. I currently have 6 different retirement accounts, but as far as I know, everything that was done over the years was done within the rules with the blessing of the CPAs and the TPA.

[litovskyassetmanagement]

I have had access to multiple 401k/403b plans at various times. Some were within the controlled group under my ownership. Others were with my outside employer. What I did was to make sure that I never exceeded the employee contribution limits in any year, when adding up the contributions to all of the plans for that particular year. As far as the controlled group, I only made employer contributions to one of the plans in any given plan year. The pension accountant (third party administrator) signed off on everything we did. I currently have 6 different retirement accounts, but as far as I know, everything that was done over the years was done within the rules with the blessing of the CPAs and the TPA.

That's not how controlled group works in practice. The TPA has to do testing of both plans together. If that's not done, then you are not following the rules. Testing is very complex, there is no way for you to anticipate how much to contribute unless it is done simultaneously to all involved plans. There is also coordination of plan documents and plan provisions which is really tricky because all documents might be different (or different enough so that it matters), and it would take a lot of careful work to do this type of test. This is why you should only work with good TPAs who are going to push back and require this vs. 'yes sir' ones who just sign of on anything to get paid. A good TPA is going to insist on doing this right or not working on the plan at all. Ultimately, the plan sponsor is responsible for any issues with the plan, not the TPA or the CPA. This is yet another reason to pick your service providers wisely. If in doubt, find a really good TPA and have them review your arrangement, they will find all types of things. If a plan like this came to us, our TPA would send you directly to the ERISA attorney to review everything and to clean things up because doing DIY controlled group testing this way is a sure recipe for breaking numerous ERISA/DOL/IRS regulations, and as a result there may be extra contributions owed to the staff, but without a combined test done properly you wouldn't even know that.

[litovskyassetmanagement]

Seeking advice on my current situation.

I have three solo 401k plans from from prior independent contractor jobs: plans A, B, and C (each are under different LLC's). I am now starting a new company (that will have employees besides myself) so I want to start a new 401k plan ... plan D (a new LLC). This will be the only plan that I contribute to henceforth. The 401k administrator company that I contacted said I must rollover my plans A B and C into IRAs. However, I don't really want to do that, just for simplicity.

This 401k company rep said: "The current set up with your existing Solo K’s and the intended new 401k would create an IRS “Controlled Group” of K plans. This means: Common ownership between the 3 Solo K’s and the new 401k requires that they all be aggregated for rules and testing. So all under one ownership umbrella (you)."

Does anyone out there know if this is accurate? If not, what's the best approach to my situation?

If you have employees in an entity D, you should simply terminate/discontinue all other plans and concentrate on entity D. If you have any other income as a 1099, you can adopt the plan for entity D by whatever entity that's going to get the 1099 income, but it has to be the same plan. Doing combined testing is expensive and not recommended since you only get a single plan limit with a controlled group anyway.

[White.Beard.Doc]

That's not how controlled group works in practice. The TPA has to do testing of both plans together. If that's not done, then you are not following the rules. Testing is very complex, there is no way for you to anticipate how much to contribute unless it is done simultaneously to all involved plans. There is also coordination of plan documents and plan provisions which is really tricky because all documents might be different (or different enough so that it matters), and it would take a lot of careful work to do this type of test. This is why you should only work with good TPAs who are going to push back and require this vs. 'yes sir' ones who just sign of on anything to get paid. A good TPA is going to insist on doing this right or not working on the plan at all. Ultimately, the plan sponsor is responsible for any issues with the plan, not the TPA or the CPA. This is yet another reason to pick your service providers wisely. If in doubt, find a really good TPA and have them review your arrangement, they will find all types of things. If a plan like this came to us, our TPA would send you directly to the ERISA attorney to review everything and to clean things up because doing DIY controlled group testing this way is a sure recipe for breaking numerous ERISA/DOL/IRS regulations, and as a result there may be extra contributions owed to the staff, but without a combined test done properly you wouldn't even know that.

I’m speaking of my employee contributions on the one hand. My employee contributions, when totaled up, never exceeded the annual limit in any given year, whether it was a year when I contributed where I was a worker for an outside entity, or another year where I contributed as an owner/employee to the plan with one of several entities within the controlled group.

As far as the controlled group, the TPA did fairness testing for all entities as if they were a single plan, and all employer contributions were based on the instructions of the TPA simultaneously for all entities within the controlled group.

[litovskyassetmanagement]

I’m speaking of my employee contributions on the one hand. My employee contributions, when totaled up, never exceeded the annual limit in any given year, whether it was a year when I contributed where I was a worker for an outside entity, or another year where I contributed as an owner/employee to the plan with one of several entities within the controlled group.

As far as the controlled group, the TPA did fairness testing for all entities as if they were a single plan, and all employer contributions were based on the instructions of the TPA simultaneously for all entities within the controlled group.

Yes, if they did the testing, that's the way to go, but still it is expensive and all plan provisions have to be coordinated, so it is usually not the best course of action. Adopting the same plan by different entities is a lot easier not to mention cost effective in most cases, I've never seen a controlled group arrangement where combined testing was done as this usually benefits the TPA (extra fees), not the plan sponsor (complexities and extra work for everyone).

[spiritrider]

I agree with Kon, the multiple 401k plans were totally unnecessary. If the first plan used an Ascensus/many others plan document/adoption agreement. All members of the Controlled Group we're automatically included in the first plan. This is quite common. If not as also mentioned, amending the adoption agreement to add other members of a Controlled Group is quite trivial.

The bigger problem is that every 401k plan should operate under an IRS opinion letter. The moment more than one plan was adopted by the same employer, the opinion letter no longer applied to Section 415 and 416 compliance.

The only compliant way I am aware of for an employer to operate more that one 401k plan. Is to have or amend the plans to specifically handle 415/416 coordination. Then file with the IRS for a favorable determination letter. This will cost several thousand$ in filing fees and professional/legal costs with no guarantee of success.

It is all well and good that the contributions were within the limit. However, at that point there was no IRS approval that the plan was compliant. A 401k plan is about far more than contribution limits. All subsequent contributions to all plans were potentially non-qualified.

The problem now is that you need to terminate all one participant plans to adopt an ERISA 401k plan covering non-owner/spouse eligible employees. However, you must ensure that the plan is fully compliant before terminating. Or you risk disqualification of the plan. Which could require forced distribution, early withdrawal penalties and the inability to rollover the assets.

I don't know if Kon agrees, but I think at a minimum you should consult with an ERISA lawyer (not related to this TPA). While it is rarely done with one-participant 401k plans, a plan termination determination letter filing may be in order.

P.S. See what your one-participant 401k plan documents, adoption agreements and opinion letters say about multiple 401k plans for the same employer. To reiterate, a Controlled Group is considered one employer for employer retirement plan purposes.

[litovskyassetmanagement]

I agree with Kon, the multiple 401k plans were totally unnecessary. If the first plan used an Ascensus/many others plan document/adoption agreement. All members of the Controlled Group we're automatically included in the first plan. This is quite common. If not as also mentioned, amending the adoption agreement to add other members of a Controlled Group is quite trivial.

The bigger problem is that every 401k plan should operate under an IRS opinion letter. The moment more than one plan was adopted by the same employer, the opinion letter no longer applied to Section 415 and 416 compliance.

The only compliant way I am aware of for an employer to operate more that one 401k plan. Is to have or amend the plans to specifically handle 415/416 coordination. Then file with the IRS for a favorable determination letter. This will cost several thousand$ in filing fees and professional/legal costs with no guarantee of success.

It is all well and good that the contributions were within the limit. However, at that point there was no IRS approval that the plan was compliant. A 401k plan is about far more than contribution limits. All subsequent contributions to all plans were potentially non-qualified.

The problem now is that you need to terminate all one participant plans to adopt an ERISA 401k plan covering non-owner/spouse eligible employees. However, you must ensure that the plan is fully compliant before terminating. Or you risk disqualification of the plan. Which could require forced distribution, early withdrawal penalties and the inability to rollover the assets.

I don't know if Kon agrees, but I think at a minimum you should consult with an ERISA lawyer (not related to this TPA). While it is rarely done with one-participant 401k plans, a plan termination determination letter filing may be in order.

P.S. See what your one-participant 401k plan documents, adoption agreements and opinion letters say about multiple 401k plans for the same employer. To reiterate, a Controlled Group is considered one employer for employer retirement plan purposes.

Yes, when in doubt, always talk to an ERISA attorney. My current TPA does not take over plans like that unless ERISA attorney reviews them for compliance. A lot of TPAs are small firms that don't have a lot of compliance experience (or they are very large firms that don't care), so the plan sponsor has to be more proactive and use independent outside counsel when there are questions such as this. Who knows what else they might find? Better get it all under control sooner rather than later. There are just way too many ways these plans can get screwed up, and plan sponsor will always be left holding the bag. For a group practice plan, having an ERISA attorney on retainer (or having the one you trust available to provide advice) is a necessary thing, and having them review and sign off on any questions/issues is probably going to save plan sponsors lots of trouble in the future. Also, a TPA should know when they are out of their comfort zone and when things are too complex that require an ERISA attorney review. Maybe in this case everything was reviewed, but you always need a written letter from the attorney supporting plan sponsor decisions.

[bobbybee22]

If you have employees in an entity D, you should simply terminate/discontinue all other plans and concentrate on entity D. If you have any other income as a 1099, you can adopt the plan for entity D by whatever entity that's going to get the 1099 income, but it has to be the same plan. Doing combined testing is expensive and not recommended since you only get a single plan limit with a controlled group anyway.

Thank you, Kon - I will only concentrate on entity D now. How should I terminate/discontinue the other plans? Rollover to the new entity D as one big combined 401k or rollover into an IRA?

[litovskyassetmanagement]

Thank you, Kon - I will only concentrate on entity D now. How should I terminate/discontinue the other plans? Rollover to the new entity D as one big combined 401k or rollover into an IRA?

I would roll them over into the entity D plan is the best solution. I wouldn't move them to an IRA as that will not allow you to do backdoor Roth. As always with any advice on the forum, consult with your TPA as we might not see the whole picture of what's going on with your specific situation.

[spiritrider]

I still would not terminate the three one-participant 401k plans and rollover the assets without a review by an ERISA lawyer not connected to the TPA.