When the self-employed individual sets up both a defined benefit plan (DBP) and defined contribution plan such as a self-employed self-directed solo 401k plan for his self-employed business, such a plan combination is referred to as DB(K) Plans or defined benefit/401k. This plan combination was made possible with the passage of Pension Protection Act of 2006 (PPA). See IRC Sec. 414(x).
Generally just one plan suffices when trying to maximize annual retirement account contributions, so the majority of owner-only businesses will settle for solely opening a self-directed solo 401k and will open a traditional IRA as well to get extra funds in their retirement account.
For High Income Earners
However, typical high income earners such as doctors and attorneys who seek to contribute more than the annual contribution limit afforded under a solo 401k plan will use the DB(K) combination.
Maximizing Employer Contributions
A defined benefit is an employer plan that is sponsored by the self-employed business, and it only allows for employer contributions. When contributing to both a defined benefit plan and a solo 401k plan, the business owner will maximize the employer contributions to the DBP because it allows for larger dollar contributions than other plans such as the solo 401k plan, and will make the employee contributions to the solo 401k plan.
Employee Contributions
Since the only type of contribution a defined benefit plan (DBP) can accept is employer contributions because it is not a defined contribution plan, the owner-only business will open a solo 401k plan for solely making annual employee contributions.
DB(k) Requires Separate Accounting
For those who want to use the DB(K) plans combo, two separate plans must be adopted–a solo 401k plan and a defined benefit plan. The assets for each plan must be accounted for separately. Also, the 401k rules apply to the solo 401k plan and the define benefit rules apply to the defined benefit plan, so you cannot apply the rules of one plan to the other (e.g., the distribution rules that apply to the solo 401k plan cannot be applied to the defined benefit plan and vice versa).
Keep My Solo 401k & Open a DBP QUESTION:
I plan to open a defined benefit plan (DBP) for 2020. Can I still keep my solo 401k from previous years and NOT fund it anymore but continue funding the 401k portion of the DBP or do I have to roll the money from the solo401k into the 401k portion of the DBP and say goodbye to my solo401k.
ANSWER:
Yes you can keep the solo 401k open without contributing to it as long as you are still self-employed. Note that the DBP can only accept employer contributions. Also, you will need to combine the fair market value of each plan ( the solo 401k and DPB) do determine the $250,000 Form 55000-EZ filing threshold, and if the combined value of both plans exceeds $250,000, a separate Form 5500-EZ will need to be filed for each plan regardless if the value of one of the plans is under $250,000.
QUESTION:
If a Solo 401k participant establishes a Defined Benefit Plan or a Cash Balance Plan after their Solo 401k is established, do their Solo 401k plan documents have to be amended?
RESPONSE:
The Solo 401k plan documents do not need to be amended solely because the participant establishes a Defined Benefit Plan (DBP) or a Cash Balance Plan (CBP) after the Solo 401k has been established. However, when determining whether a Form 5500-EZ filing is required, the total value of both the Solo 401k and the DBP/CBP must be aggregated to determine if the $250,000 filing threshold has been met.
QUESTION:
If a Solo 401k participant’s Solo 401k account balance does not exceed $250k by 12/31 but their combined Solo 401k and DB Plan or CB Plan balances exceed $250k together, does a Form 5500 have to be filed?
RESPONSE:
Yes, if the combined value of the Solo 401k and the Defined Benefit Plan (DBP) or Cash Balance Plan (CBP) exceeds $250,000 as of December 31, a Form 5500-EZ must be filed with the IRS by July 31 of the following year. The IRS requires that all qualified plans under the same employer be aggregated when determining the $250,000 filing threshold.
QUESTION:
If a Solo 401k participant’s Solo 401k balance did exceed $250k in a prior year and a Form 5500 was filed but the 5500 did not take any DB Plan or CB Plan balances into account, must an amended Form 5500 be filed? What would that process look like and what would the cost be?
RESPONSE:
If a Form 5500-EZ was previously filed but did not include consideration of a Defined Benefit Plan (DBP) or Cash Balance Plan (CBP) balance when determining whether the $250,000 filing threshold was met, an amendment is not required. However, it is important to note that when determining whether a Form 5500-EZ must be filed for the Solo 401k, the total balance of all qualified plans under the same employer (including a DBP or CBP) must be aggregated.
Even though the total balance of the Solo 401k and DBP/CBP is used to determine if the $250,000 threshold has been met, a separate Form 5500-EZ must be filed for the Solo 401k, and a separate Form 5500 must be filed for the DBP/CBP.
For the Defined Benefit Plan or Cash Balance Plan, the filing of the required Form 5500 must be handled separately by the administrator of that plan.
QUESTION:
On your website, you list the business’s tax filing deadline as the deadline for making both employee and employer/profit sharing contributions. Would you mind letting me know where the IRS has this published guidance or where you have found confirmation of this? Publication 560 looks to address only employee elective deferral deadlines. I wanted to ask because we’ve received conflicting opinions on when after-tax/employer/profit sharing contributions can be made to a Solo 401k.
RESPONSE:
Please see chart on page 3 of Pub 560 (note: after-tax contributions are a type of employee contributions so covered by the same deadline).
Since the Solo 401k plan has already been established, contributions can be made by the business tax return deadline, including extensions in 2025.
