Author Topic: Do 401k employee participation rules apply to owners?  (Read 456 times)

pantherchams

  • 5 O'Clock Shadow
  • *
  • Posts: 17
Do 401k employee participation rules apply to owners?
« on: July 10, 2018, 11:16:04 AM »
On July 1, I became a partner at a small consulting firm.  The 401(k) plan has the following requirements for employee participation:

1) 1 year of service
2) Entry only on Jan 1 or July 1 following completion of #1

I started with the firm on August 1, 2017.  As such, the partner that manages the plan says I am not eligible to participate until January 1, 2019.

Is this correct?  Do the same employee participation rules apply to owners?

I was really hoping I could enroll and max out my 2018 contributions before the end of the year.  I have the plan documents, but I cannot speak directly with the plan administrator (Fidelity) about the issue, as I am not enrolled in the plan currently...

Any help or guidance would be much appreciated!!

jlcnuke

  • Pencil Stache
  • ****
  • Posts: 758
Re: Do 401k employee participation rules apply to owners?
« Reply #1 on: July 10, 2018, 11:34:28 AM »
On July 1, I became a partner at a small consulting firm.  The 401(k) plan has the following requirements for employee participation:

1) 1 year of service
2) Entry only on Jan 1 or July 1 following completion of #1

I started with the firm on August 1, 2017.  As such, the partner that manages the plan says I am not eligible to participate until January 1, 2019.

Is this correct?  Do the same employee participation rules apply to owners?

I was really hoping I could enroll and max out my 2018 contributions before the end of the year.  I have the plan documents, but I cannot speak directly with the plan administrator (Fidelity) about the issue, as I am not enrolled in the plan currently...

Any help or guidance would be much appreciated!!

As a general rule, yes that is probably correct based on the rules stated and the rules would apply to everyone, including company owners, management, and anyone else employed at the company. If the rules don't have a specific exception for you, then you'll have to follow them too.  As a partner I'd recommend trying to get the rules changed moving forward because that's a really crappy set of rules for participation in the 401k.

pantherchams

  • 5 O'Clock Shadow
  • *
  • Posts: 17
Re: Do 401k employee participation rules apply to owners?
« Reply #2 on: July 10, 2018, 11:36:28 AM »
Quote
As a general rule, yes that is probably correct based on the rules stated and the rules would apply to everyone, including company owners, management, and anyone else employed at the company. If the rules don't have a specific exception for you, then you'll have to follow them too.  As a partner I'd recommend trying to get the rules changed moving forward because that's a really crappy set of rules for participation in the 401k.

Thanks, that sucks, and I agree.  I will be taking over management of the plan as soon as I am eligible to participate, and getting this changed will be high on my list of priorities.

Mother Fussbudget

  • Pencil Stache
  • ****
  • Posts: 818
  • Age: 56
  • Location: Seattle, WA
Re: Do 401k employee participation rules apply to owners?
« Reply #3 on: July 11, 2018, 12:29:13 PM »
Ask if you can join the plan on 1.1.2019 and then make contributions for the prior tax year (can be done between 1/1 and 4/15/2019).
In the meantime, you should consider a solo 401K plan for 2018 contributions. 

Cromacster

  • Handlebar Stache
  • *****
  • Posts: 1587
  • Location: Minnesnowta
Re: Do 401k employee participation rules apply to owners?
« Reply #4 on: July 11, 2018, 12:37:50 PM »
Ask if you can join the plan on 1.1.2019 and then make contributions for the prior tax year (can be done between 1/1 and 4/15/2019).
In the meantime, you should consider a solo 401K plan for 2018 contributions.

The period between 1/1 - Tax day only applies for IRA's not 401k's

pantherchams

  • 5 O'Clock Shadow
  • *
  • Posts: 17
Re: Do 401k employee participation rules apply to owners?
« Reply #5 on: July 11, 2018, 12:41:26 PM »
Ask if you can join the plan on 1.1.2019 and then make contributions for the prior tax year (can be done between 1/1 and 4/15/2019).
In the meantime, you should consider a solo 401K plan for 2018 contributions.

My understanding is that 401k contributions have to occur in the year the money was earned/deducted?  Is this incorrect?

Thanks for the tip on a solo plan - I just talked to Vanguard and they seem to think that since I am an owner with eligible employees I a cannot open my own solo* 401k for 2018.

If I am wrong on either account please let me know!

*edited to add "solo"
« Last Edit: July 11, 2018, 12:45:54 PM by pantherchams »

Mother Fussbudget

  • Pencil Stache
  • ****
  • Posts: 818
  • Age: 56
  • Location: Seattle, WA
Re: Do 401k employee participation rules apply to owners?
« Reply #6 on: July 11, 2018, 01:39:08 PM »
Ah!  Correct.  One can only contribute to a 401K in the same calendar year.  [catch-up contributions can only be done for IRA's]

As for Vanguard, let them know you are *NOT* eligible for your own company's 401K plan for 2018, and ask if that makes a difference on opening a solo 401K.

terran

  • Handlebar Stache
  • *****
  • Posts: 1391
Re: Do 401k employee participation rules apply to owners?
« Reply #7 on: July 11, 2018, 01:44:53 PM »
Don't go opening a solo 401(k) for your work at this business (a business can't have two 401(k) plans) and be very careful about opening one at all even if you have outside self employed income as you could run afoul of controlled group rules which treat multiple businesses owned by the same person as a single business for retirement plan purposes (to discourage people from opening a retirement plan for one business to avoid opening one for employees that work in another business they own).

pantherchams

  • 5 O'Clock Shadow
  • *
  • Posts: 17
Re: Do 401k employee participation rules apply to owners?
« Reply #8 on: July 11, 2018, 01:47:18 PM »
Don't go opening a solo 401(k) for your work at this business (a business can't have two 401(k) plans) and be very careful about opening one at all even if you have outside self employed income as you could run afoul of controlled group rules which treat multiple businesses owned by the same person as a single business for retirement plan purposes (to discourage people from opening a retirement plan for one business to avoid opening one for employees that work in another business they own).

Copy that, thanks.