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Two questions about terminated 401k

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  • Avatar Jim 
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    Status: Physician
    Posts: 68
    Joined: 01/08/2016
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    So my employer (used to be a private practice, was swallowed up by a multigroup conglomerate last year) is finally closing their old 401k, since the conglomerate uses a different provider/custodian.  I have 4 types of contributions in the account:

    1. My own payroll-deduction contributions, 100% Roth (100% vested, obviously)

    2. Employer match

    3. Profit sharing

    4. Safe harbor (100% vested by IRS regulations)

    2, 3, and 4 are all from the employer.  Due to the old employer vesting schedule rules, I am only 20% vested in #2 and #3.  Custodian website actually shows that I am 0% vested in those, but that is a clerical error which I assume could be fixed fairly easily.

    Here’s the thing: according to IRS regulations (ref: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-plan-terminations ) I should now be 100% vested in #2 and #3 as well.  When I called the custodian and spoke to a rep, he put me on hold and eventually came back and told me that according to the plan SPD, I am not vested in those contributions.  I tried to explain to him that IRS rules override SPD rules, but he was just a cust svc rep and didn’t know any better, so I didn’t argue with him.  He told me to talk to my HR people.  Thing is, I did that several months ago and they told me the same thing (that I am not vested in employer contributions except Safe Harbor.)

    I am reasonably sure by reading the IRS page referenced above that I am right.  But I can’t get my HR dept nor the 401k custodian to see it that way.  So what do I do??

    That was the long-winded first question.  Second question is, I have a Solo-401k with 2 sub-accounts, traditional SoloK and Roth SoloK.  Can I roll my Roth money into the Roth SoloK, and the pretax money into the traditional SoloK, even though I haven’t done any 1099 work in almost 2 years??  I am worried that the IRS might cry foul because I am not really an independent contractor anymore.

    Jim

     

    #191198 Reply
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8325
    Joined: 01/09/2016
    1. I don’t know. Hire @spiritrider?
    2. Irrelevant at this point. Just as the IRS could cry foul on the rollover, it could cry foul on your current situation. A 401k must have a sponsoring employer or it is required to be terminated. At this point, if you are saying you will never do any more IC work, you need to close the solo-k’s and r/o to the relevant IRAs. However, if you are just “taking a break” and may resume at some point in the future, then you should not have an issue either way. Of course, only you know what is locked inside your head until you commit “I quit IC forever” to paper or you lose your license…hint hint.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #191206 Reply
    Avatar Jim 
    Moderator
    Status: Physician
    Posts: 68
    Joined: 01/08/2016

    Thanks for that answer to #2, I was not aware of that.  I would never say that I am done with IC work, I just don’t have a lot of time & opportunity for it at this time.  Come to think of it, CompHealth left me a message just the other day, maybe I should do a little moonlighting.

    Regarding my first question, do you have any opinion whether I am right or wrong in believing that I am entitled to 100% vesting in that money, according to the IRS?

     

    #191214 Reply
    Avatar spiritrider 
    Participant
    Status: Small Business Owner
    Posts: 1964
    Joined: 02/01/2016
    1. There are very specific and extremely complicated IRS regulations regarding the merger and acquisition of an employer and the subsequent treatment of a 401k plan. The treatment is dependent on whether it was a merger or acquisition (asset sale or equity transaction) and whether the seller terminated/is terminating the plan. I am not qualified to make a judgement on this. You need to find out exactly what is happening to the plan.
      1. The plan can be terminated and the assets distributed/rolled over. In this circumstance all non-vested employer contributions should be fully vested.
      2. The plan can continue under certain circumstances.
      3. The plan can be merged into the new company’s plan.
      4. The plan can be frozen and eventually use one of the above options.
    2. Whether a one-participant 401k actively exists and can accept rollover contributions is a function of the status and type of the business entity. A 401k plan requires a sponsor (business/employer) and generally must be terminated if the sponsor ceases to exist. If the plan was sponsored by either a an S-Corp or partnership that formally dissolved then generally the 401k plan must be terminated within one year.

    However, the IRS intends that 401k plans are semi-permanent and considers a sole proprietorship to exist from the first year of profitable operation until death. So the mere fact that you do not have current earned income from that business does not mean that the sole proprietorship ceases to exist. In fact 401(c) explicitly states that you are a self-employed individual if you have had earned income from self-employment in any prior year.

    The driving force for the IRS to require plans to terminate within one year of the cease of business is to protect common law employees. Even in this case the IRS action is to force a partial termination requiring 100% vesting of all employer contributions. As a one-participant 401k all employer contributions are already required to be 100% vested. So there really is no reason for the IRS to force termination of a sole proprietor.

    #191225 Reply
    Liked by jfoxcpacfp
    jfoxcpacfp jfoxcpacfp 
    Moderator
    Status: Financial Advisor, Accountant, Small Business Owner
    Posts: 8325
    Joined: 01/09/2016
    Whether a one-participant 401k actively exists and can accept rollover contributions is a function of the status and type of the business entity. A 401k plan requires a sponsor (business/employer) and generally must be terminated if the sponsor ceases to exist. If the plan was sponsored by either a an S-Corp or partnership that formally dissolved then generally the 401k plan must be terminated within one year. However, the IRS intends that 401k plans are semi-permanent and considers a sole proprietorship to exist from the first year of profitable operation until death. So the mere fact that you do not have current earned income from that business does not mean that the sole proprietorship ceases to exist. In fact 401(c) explicitly states that you are a self-employed individual if you have had earned income from self-employment in any prior year. The driving force for the IRS to require plans to terminate within one year of the cease of business is to protect common law employees. Even in this case the IRS action is to force a partial termination requiring 100% vesting of all employer contributions. As a one-participant 401k all employer contributions are already required to be 100% vested. So there really is no reason for the IRS to force termination of a sole proprietor.

    Click to expand…

    Thank you so much for that detailed answer. I learn so much from you and especially on this one.

    Johanna Fox Turner, CPA, CFP: I am not your financial advisor; any responses are for general purposes only
    http://www.fox-cpas.com/for-doctors-only ~ [email protected]

    #191230 Reply
    Avatar Jim 
    Moderator
    Status: Physician
    Posts: 68
    Joined: 01/08/2016
    Thank you so much for that detailed answer. I learn so much from you and especially on this one.

    Click to expand…

    Wow, no kidding.  Thank you so much, @spiritrider.  It sounds like I will need to speak to the old group’s accountant to figure out if I should be vested in the old 401k or not.

     

    Ed: I am so sorry for that post snafu.  I just went to look at spiritrider’s profile, and somehow I “became” him.  Idk how that happened.  I should turn in my moderator’s badge in shame. 🙁

    #191254 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 944
    Joined: 01/09/2016
    1. There are very specific and extremely complicated IRS regulations regarding the merger and acquisition of an employer and the subsequent treatment of a 401k plan. The treatment is dependent on whether it was a merger or acquisition (asset sale or equity transaction) and whether the seller terminated/is terminating the plan. I am not qualified to make a judgement on this. You need to find out exactly what is happening to the plan.
      1. The plan can be terminated and the assets distributed/rolled over. In this circumstance all non-vested employer contributions should be fully vested.
      2. The plan can continue under certain circumstances.
      3. The plan can be merged into the new company’s plan.
      4. The plan can be frozen and eventually use one of the above options.
    2. Whether a one-participant 401k actively exists and can accept rollover contributions is a function of the status and type of the business entity. A 401k plan requires a sponsor (business/employer) and generally must be terminated if the sponsor ceases to exist. If the plan was sponsored by either a an S-Corp or partnership that formally dissolved then generally the 401k plan must be terminated within one year.

    However, the IRS intends that 401k plans are semi-permanent and considers a sole proprietorship to exist from the first year of profitable operation until death. So the mere fact that you do not have current earned income from that business does not mean that the sole proprietorship ceases to exist. In fact 401(c) explicitly states that you are a self-employed individual if you have had earned income from self-employment in any prior year.

    The driving force for the IRS to require plans to terminate within one year of the cease of business is to protect common law employees. Even in this case the IRS action is to force a partial termination requiring 100% vesting of all employer contributions. As a one-participant 401k all employer contributions are already required to be 100% vested. So there really is no reason for the IRS to force termination of a sole proprietor.

    Click to expand…

    When a plan is terminated, all assets are 100% vested.  OP is totally correct.  If current employer does not know that, then that’s a big problem.  You need to speak with the actual Third Party Administrator for the plan, and they should be made aware of this because if the assets are not treated correctly, the new plan is on the hook for any issues with the IRS/DOL.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #192039 Reply
    Liked by jfoxcpacfp
    Avatar Jim 
    Moderator
    Status: Physician
    Posts: 68
    Joined: 01/08/2016
    You need to speak with the actual Third Party Administrator for the plan, and they should be made aware of this

    Click to expand…

    As I said in the original post, I did call the plan administrator and spoke to a CSR who just put me on hold, came back and told me that according to the SPD I was not vested in employer contributions.  When I tried to tell him that it was an IRS rule, he just repeated.  Realizing that I was not going to get anywhere with him, I just said thanks and goodbye.  I have now bounced the ball back to my employer and tried to make them aware of the rules, and am waiting for their response.  Stay tuned….

     

    if the assets are not treated correctly, the new plan is on the hook for any issues with the IRS/DOL.

    Click to expand…

    Can you elaborate on this?  How are they “on the hook”?  What consequences might they face?

    #192073 Reply
    Kon Litovsky Kon Litovsky 
    Participant
    Status: Financial Advisor
    Posts: 944
    Joined: 01/09/2016

    You need to speak with the actual Third Party Administrator for the plan, and they should be made aware of this

    Click to expand…

    As I said in the original post, I did call the plan administrator and spoke to a CSR who just put me on hold, came back and told me that according to the SPD I was not vested in employer contributions.  When I tried to tell him that it was an IRS rule, he just repeated.  Realizing that I was not going to get anywhere with him, I just said thanks and goodbye.  I have now bounced the ball back to my employer and tried to make them aware of the rules, and am waiting for their response.  Stay tuned….

     

    if the assets are not treated correctly, the new plan is on the hook for any issues with the IRS/DOL.

    Click to expand…

    Can you elaborate on this?  How are they “on the hook”?  What consequences might they face?

    Click to expand…

    Well, for one thing, the new employer is on the hook because any issues that were not resolved with the prior plan are the property of the new employer, since they now own the previous one. I have no idea what the consequences might be, but if they are denying the benefit rightfully earned by the staff, they are violating ERISA, and they can be on the hook if someone calls them in (and it would not take long for DOL to investigate). I don’t know whether there would be any penalties imposed, but if DOL gets involved they might find other things as well. So it is in everyone’s best interest to resolve this since presumably there are multiple participants affected by this error.  Often, the service provider can be quite oblivious if this is a large record-keeper that the new plan is with (too many layers of support staff vs. those who take ownership). So the plan sponsor is better off consulting an ERISA attorney and working with the current plan provider to fix this error.  The issue is that even if the error is due to the current record-keeper, plan sponsor is still responsible for it 100%.

    So if this is just you, that’s one thing.  If it is a plan-wide error, that’s a much bigger issue.

    Kon Litovsky, Principal, Litovsky Asset Management | [email protected]
    -401k and Cash Balance plans for solo and group practices, fixed/flat fee, no AUM fees

    #192076 Reply
    Avatar Bartl007 
    Participant
    Status: Physician
    Posts: 74
    Joined: 01/30/2016

    You are correct that you should be fully vested in all contributions after the acquisition of the practice. This exact thing happened to my practice (asset sale) as well and we were all fully vested in all employer contributions regardless of vesting schedules on the SPD.

    I had the same experience talking with the do-do birds at Mass mutual and having them blindly recite my plan document vesting schedule. It may be worth talking with the HR people of the corporation that just aquired your practice. They likely have much more experience with how the old 401k’s are handled in prior acquisitions.

    Another word of caution, make sure you double check your total 401k contributions to your old and new plan for the tax year so you don’t contribute above the $18500 limit for 2018 ($19000 for 2019). Very easy to do if YOU are not paying attention. I promise no one else will be checking on your behalf.

    #192507 Reply
    Avatar Jim 
    Moderator
    Status: Physician
    Posts: 68
    Joined: 01/08/2016

    Good news…somebody talked to somebody who knew the rules, and I got a CC: of an email from a client service manager at the custodian saying that they are adjusting all accounts to be 100% vested.  Now I can move my money (all of it!) out of the plan.

    Solved on WCI 🙂

    #192600 Reply
    Liked by Hank, jfoxcpacfp

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