Solo 401k. Moving from a small business owner to an independent contractor.

[Iamdoc]

My wife had her own business as a dentist but recently closed her office to join another dentist. She is now working as a 1099 independent contractor but has maintained her s-corp business. Therefore the revenue from her work will get paid directly to her s-corp and she would then pay herself as an employee. (No schedule C). She has a small business 401k plan along with her previous employees which is managed by an investment advisor at Morgan Stanley and a separate independent plan administrator who files form 5500.

My question is can she now open a solo/individual 401k with etrade since she’s the only employee of her business?
Her prior employees would then be forced to rollover there 401k since we would close her plan.
I would then manage her investments.
My second question is can we do our own form 5500 or do we need to keep the plan administrator?

Thanks.

[jfoxcpacfp]

She has a new plan sponsor and will, therefore, need to close the current 401k and open a new (solo) 401k as an IC sponsor, including new EIN. Sorry the former employees will have to move their plan balances, but it happens all the time and is not that difficult. Plus, it opens up possibiities that were not there before. If they work for the buyout employer, they should have already been provided with this info.

[Iamdoc]

Thanks. What if her EIN hasn’t changed? She is maintaining her current small business. We just want to close her current 401k and open a new individual 401k just for her since she no longer has employees.

[litovskyassetmanagement]

My wife had her own business as a dentist but recently closed her office to join another dentist. She is now working as a 1099 independent contractor but has maintained her s-corp business. Therefore the revenue from her work will get paid directly to her s-corp and she would then pay herself as an employee. (No schedule C). She has a small business 401k plan along with her previous employees which is managed by an investment advisor at Morgan Stanley and a separate independent plan administrator who files form 5500.

My question is can she now open a solo/individual 401k with etrade since she’s the only employee of her business?
Her prior employees would then be forced to rollover there 401k since we would close her plan.
I would then manage her investments.
My second question is can we do our own form 5500 or do we need to keep the plan administrator?

Thanks.

She probably should terminate this old 401k and distribute all participants. But if she does that, she would not be allowed to open a new 401k for the same entity for 1 year. I wonder if she can just open a solo 401k plan for the same entity first, and then terminate the other plan. In that case she does not need a TPA at all, the TPA is needed to terminate the prior plan. This is tricky, you should be able to ask the TPA about that though, they would be able to tell you if this is going to work. It might not because you pretty much would need to use the same plan document/options from before, which won't be possible with an off the shelf plan. But since she is the only remaining employee I don't see how this would be a problem.

[truphao]

I think there are 2 separate questions being asked here:
1) What is the best way to unwind the existing plan to save on administrative/investment fee associated with the former employees and eliminate the fiduciary liability and
2) What is the best way to save for retirement on tax-deferred basis for the new business structure/situation

Regarding question #, the straightforward approach is to terminate the existing plan. That would require TPA services. The alternative might be to encourage former employees through a robust appropriate communication to voluntary request the distribution of their benefits. They are no longer employed and thus can request the distribution. If that is accomplished, the existing plan can continue without formal termination, thus avoiding a one-year waiting period for restart. That it becomes a question what steps and changes to the existing Plan Doc are needed to transfer from MS to one of the soloK platforms.

[Iamdoc]

Thanks for all of the responses.

[litovskyassetmanagement]

I think there are 2 separate questions being asked here:
1) What is the best way to unwind the existing plan to save on administrative/investment fee associated with the former employees and eliminate the fiduciary liability and
2) What is the best way to save for retirement on tax-deferred basis for the new business structure/situation

Regarding question #, the straightforward approach is to terminate the existing plan. That would require TPA services. The alternative might be to encourage former employees through a robust appropriate communication to voluntary request the distribution of their benefits. They are no longer employed and thus can request the distribution. If that is accomplished, the existing plan can continue without formal termination, thus avoiding a one-year waiting period for restart. That it becomes a question what steps and changes to the existing Plan Doc are needed to transfer from MS to one of the soloK platforms.

They want to terminate it to get the assets out of the AUM fee adviser, and also this will encourage swift distributions to everyone. And OP probably does not want to pay the existing TPA when they are the only solo participant. But doing so will result in the 1 year waiting period. So if there is a way to get this one done with an individual plan without having to wait a year, that's a good solution, but it might require a TPA for the individual plan.

[spiritrider]

There does not appear to be a new employer/plan sponsor, but rather a continuation of the same employer/plan sponsor, just with only a single 2% shareholder-employee remaining.

This brings up a bit of a catch-22 situation. Termination of the ERISA 401k plan is rather clean, but would invoke the successor plan rule. A one participant plan could not be adopted for one year. Even if this was a different business entity. I'm pretty sure it would be considered the same employer still subject to the successor plan rule.

The existing 401k plan could not become a one-participant 401k plan until all non-owner/spouse employees who could not be forced out, voluntarily distributed or rolled over their full balances. None of this would prevent amending the 401k plan document/adoption agreement, etc... while maintaining an ERISA 401k plan.

I wonder if there might be a way to partially terminate (fully vest if not safe harbor) and freeze the existing plan, such that the successor plan rule would not apply. I think this may very well be a situation that only a professional TPA can provide answers.