SEC In Process of Investigating 457 and 403b Plans

Unlike a 401k plan such as a solo 401k plan for the self-employed with not full-time W-2 employees where the trustee is viewed as the shareholder, the SEC sees the 403b participant as the shareholder.  According to  a Wall Stree Journal article, the SEC agency is seeking details on how administrators—which often serve crucial roles in selecting investments for 403(b) and 457 retirement plans for employees including teachers and government workers—choose investment options and police themselves when conflicts of interest arise.

While state laws generally require government entities to manage their 403(b) and 457 retirement plans in employees’ best interests, they aren’t governed by the federal pension laws that privately sponsored 401(k) and 403(b) plans must adhere to. The enforcement and penalties for violations aren’t as stringent as with these federally regulated plans, said Bob Toth, an attorney in Fort Wayne, Ind., specializing in employee-benefits law.

In the Wall Street Journal article, the paper lists the following key points of interest by the SEC.

  • the compensation the administrators have received since Jan. 1, 2017 as a result of referring investors to specific investment options or companies, and documents related to that compensation;
  • “information and documents” concerning how investors receive investment counseling;
  • explanations concerning gifts administrators received from investment vendors; and
  • organizational charts showing companies that own, are connected to, or are partners with plan administrators.

Closing Comments

One of the big differences between a self-directed solo 401k and a 403b and 457 government plan is that the solo 401k trustee directs the investments into both equities and alternative investments such as real estate, notes, tax liens, metals, crypto currency, etc. Whereas generally 403bs and 457 plans are generally solely invested in equities and the participants don’t have a say in investing in other investment types allowed under the Code.

8/15/2019 Memo IRS Reviews Employer Contribution Deduction Rules

In memorandum 201935011 the IRS provides general legal advice on the determination of whether a contribution by an employer to the employer’s qualified retirement plan (note that a solo 401k plan falls under the qualified plan umbrella and allows for employer contributions) has actually been paid to the plan’s trust such that the contribution is deductible under § 404(a) of the Internal Revenue Code (“Code”) for the employer’s taxable year in which the contribution is made (assuming all other applicable requirements are satisfied). This determination is made under the standards set forth in Don E. Williams Co. v. Commissioner, 429 U.S. 569 (1977), which applies an objective outlay-of-assets test.
This memorandum describes the elements of this test, provides that the application of the test is made taking into account the relevant facts and circumstances of the contribution, and includes illustrative examples.


For purposes of § 404(a), how is a determination made that an employer’s contribution has been paid within the meaning of § 404(a) to the trust of a qualified retirement plan in a taxable year of the employer maintaining the plan for which the employer claims a deduction?


For a contribution by an employer to the trust of a qualified retirement plan maintained by the employer to be deductible under § 404(a) for the employer’s taxable year in which the contribution is made, the contribution must be a payment of cash (or its equivalent) or property to the trust.

Section 404(a)

Section 404(a) governs the deductibility of a contribution to the trust of a deferred compensation plan maintained by an employer for its employees that satisfies the qualification requirements of § 401(a). Pursuant to § 404(a)(6), if an employer makes a payment no later than the due date (including extensions) for filing the employer’s return for a taxable year, and if the payment is on account of that taxable year, then the employer is deemed to have made a payment on the last day of the preceding taxable year.

Types of Defined Contribution Plans

Often called DC plans, DC stands for “defined contribution” plan.

The Most Popular Types of Defined Contributions Plans

The most popular DC plans allow for both employee and employer contributions.  The most popular types of DC plans are 401k plans (note that a solo 401k falls under the defined contribution type too but it is a plan only for the self-employed) 403b plans, Thrift savings plans (TSPs) and 457b plans.

  • 401(k) plans are for employees of private sector companies.
  • Thrift savings plans (TSPs) are similar to 401(k) plans and are for employees of the federal government and for the military.
  • 403(b) plans (also known as tax-sheltered annuity or TSA plans) are for employees of public schools, tax-exempt employers (e.g., hospitals) and churches.
  • 457(b) plans (also known as deferred compensation plans) are for employees of state and local governments. 457(b) plans are also available for certain management employees of tax-exempt employers.

Individual accounts. One of the main characteristic of a defined contribution plan is that while all participants participate in the same plan, each participant has a separate holding account known as  an “individual account.” Employee contributions and employer contributions, along with investment earnings, are allocated to each separate individual account. While most defined contribution plan sponsors only allow for investment options such as mutual funds,  a solo 401k plan can generally be self-directed into alternative investments such as real estate, notes, tax liens, private equity, crypt currency and metals, as well as equities.


Take-Up Rate at 77 Percent in 2019

The Bureau of Labor Statistics released a report this September stating 77 percent of private industry workers who had access to employer-provided retirement benefits chose to participate in those benefits. This measure is known as the take-up rate. Retirement benefits include defined benefit and defined contribution plans, with solo 401k pans falling under the defined contribution umbrella.

Among the major occupational groups, the take-up rates for retirement benefits among private industry workers ranged from 58 percent for service occupations to 86 percent for management, professional, and related occupations. Take-up rates were higher for workers in larger establishments (88 percent in those with 500 or more workers) than for workers in smaller establishments (71 percent in those with 1 to 99 workers). Among full-time workers, the take-up rate was 80 percent, compared with 57 percent for part-time workers.

Breakdown Percentages of Private Industry Workers Who Had  Access to & Took Advantage of Saving for Retirement

The number of part-time workers sticks out because many are often self-employed and are not aware that they can participate in a solo 401k plan even if they are also working for a full-time employer. CLICK HERE to learn more about participating in a solo 401k plan even if you are self-employed on a part-time basis.

States File Lawsuit Against SEC Best Interest Rule

The SEC Best Interest Rule which is scheduled to take effect on June 30, 2020 is under challenge by seven states (New York, California, Connecticut, Delaware, Maine, New Mexico and Oregon) and the District of Columbia.  On September 9, 2018, these states filed a lawsuit in the U.S. District Court for the Southern District of New York essentially trying to  void the SEC Best Interest rule.  The plaintiffs argue that broker dealers are treated more favorably then investment advisers, and that the rule misleads consumers in thinking that broker-dealers are held to the same stringent rules as investment advisers.

They also claim that the rule makes it easier for brokers to market themselves as “trusted advisers” while still being able to give conflicted advice, and that the SEC contradicted “Congress’s express direction” under the Dodd-Frank Wall Street Reform and Consumer Protection Act to harmonize the standard of conduct between brokers and RIAs.

Here Are Some of the Current Reg. BI Provisions

  • Reg. BI now defines “account recommendations” to include recommendations to move assets between different types of accounts or to roll over an employer plan distribution (e.g., former empl0yer 41k plan, PSP, DBP, solo 401k, etc.) to an IRA.
  • Broker-dealers must disclose whether they will provide account-monitoring services—and the scope of those services.
  • Broker-dealers must adopt policies and procedures designed to “eliminate sales contests, sales quotas, bonuses, and non-cash compensation that are based on the sale of specific securities or specific types of securities within a limited period of time.”
  • Investment cost considerations are now explicitly required both in a broker-dealer’s Care Obligation and in the Disclosure Obligation.

  • Broker-dealers must create and enforce policies and procedures that are designed to achieve compliance with all of Reg. BI.

To read more about the SEC Best Interest Rule, VISIT HERE.

How to Later Convert ROBS 401k Funded C-Corporation to S-Corporation


If it’s possible, how would I later convert the C CORP to an S CORP? What are the implications for me, the business, and other issues?


You asked whether you can convert the C-corporation in which you have invested your retirement funds(Business Financing 401k / ROBS ) into an LLC/Scorporation.

i) As long as you own part of the C-corporation
via your 401k the entity must be  Corporation taxed as a C-corporation.  
ii) If you wish to have the entity taxed as an Scorporation or convert to an LLC, the company would first need to buy back all of the company stock held by the 401k.  
As far as the mechanics of the buybackthe corporation would purchase the stock back from the 401k over one or a series of purchase provided that it would have to do so at fair market value at the time of each buyback. As the value should be supported by a business valuation, it may be most efficient to do so at the end of the year as you will need to obtain a valuation for reporting purposes as of the end of the year (regardless of whether the corporation is buying shares back) and could use the valuation for both purposes.  The money would flow from the corporate bank account back to the 401k brokerage account on a tax-deferred basis.  
iii) The corporation would continue to sponsor a 401k but you would no longer own shares via the 401k.
Assuming that you are eligible to convert the entity to an Scorporation/LLC (i.e. because the company is no longer owned via the 401k), the decision whether to do so is something that you discussed with your business tax and/or legal adviser(s).

What are the steps for the C-Corporation buyback stock from 401k?
  • As far as the mechanics of the buybackthe corporation would purchase the stock back from the 401k over one or a series of purchase provided that it would have to do so at fair market value at the time of each buyback
  • The value of the company stock should be supported by a third-party business valuation.  
  • The money would flow from the corporate bank account back to the 401k brokerage account on a tax-deferred basis.
What is the impact to the ownership of the C-corporation?
  • As the 401k sells stock back to the C-corporation, the number of shares held by the 401k will decrease.  As a result, the 401k will own a lower percentage of the company.  
  • Conversely, the other owners of the business (i.e. you) will owner a greater percentage of the business.  
  • If the C-corporation buys back all of the stock from the 401k, you will no longer own company stock through the 401k and the other owner(s) will thus own 100% of the business    
How do I determine the price per share for the stock buyback?
  • The C-corporation must buyback the stock at fair market value.
  • While the IRS doesn’t necessarily specify items that must be in the report, they have issued guidance on valuing a closely-held corporation (e.g., see IRS Revenue Ruling 59-60). 
  • Moreover, it is certainly a best practice if the valuation is prepared by a third party who is a business valuation specialist or someone who has relevant training and experience.  
What happens to the 401k plan?
  • The corporation would continue to sponsor a 401k but you would no longer own shares via the 401k.  
What can I do with the funds in the 401k plan?
  • The proceeds of the stock buyback will be deposited in the 401k brokerage account & you can invest those funds however you see fit (e.g. stocks, bonds, mutual funds, etc.). 
Can I rollover the funds to an IRA?
  • Generally, unless you are age 59 1/2 or over, only amounts that were transferred to your 401k from other IRAs or former employer plans are the only funds that can be transferred to an IRA.

Maxing Out My Solo 401k in Addition to Fortune 500 Company 401k Plan

The 401(k) regulations allow for contributions to multiple 401(k) plans. This is especially advantageous for those who have a full-time job and participate in that employer’s 401(k), and those who also have a self-employed business and participate in that self-employed business solo 401(k).

A solo 401(k) is made up of employee and employer contributions.

The employee contribution which for 2019 is $19,000 plus $6,000 for those age 50 or older is aggregated among all 401(k) plans.

However the profit-sharing contribution (employer contribution) is not subject to this aggregation rule.

As a result, if you have a solo 401(k) plan for your self-employed business and have already contributed the $19,000 plus $6,000 to the full-time employer 401k plan, you can still contribute the profit-sharing portion to the solo 401(k) plan even though you have already contributed the maximum of $62,000 (includes the catch up amount and employer profit sharing contribution)  to the daytime job 401k plan.

For example, let’s assume that your self-employed business is an S corporation and that you want to make a contribution to the solo 401(k). Let’s further assume that you have $100,000 of W-2 income from your S corporation.

Example & The Voluntary After-Tax Solo 401k Exception

Therefore, you would be able to contribute  a profit-sharing contribution (employer) amount of $25,000 into the solo 401(k) which was calculated by multiplying 100,000 × 25%. The end result, means that you would have contributed a total of $87,000 ($62,000 plus  $25,000) in aggregate to both your daytime job employer 401(k) and your self-employed business solo 401(k) plan. However, if you also want to make voluntary after-tax contributions , you could contribute the difference up to the $56,000 ceiling to your voluntary after-tax solo 401k account since this contribution type is not subject to the aggregation rules described above. VISIT HERE to learn more about this exception.

Self-Directed Solo 401k Roth Solo 401k Recharacterization Question


I am thinking about doing an in plan Roth 401k conversion of the remaining funds in the pre-tax part of my solo 401k plan (around $300K). I am with my tax advisor now and we are questioning if this could be recharacterized (undone) later in 2019 when my tax situation becomes clearer.


That is a great question and the short answer is no. 401k funds including solo 401k funds that have been converted to a Roth 401k status (known as an in-plan conversion) cannot be recharacterized to pretax 401k funds once converted. If you wish to proceed with the in-plan Roth solo 401k conversion, your solo 401k provider will need to document and report the in-plan Roth solo 401k conversion to the IRS using Form 1099-R.

More Roth Solo 401k in-plan conversion tips

Tip 1: Roth 401k conversions are reported on form 1099R using code “G” not codes 2 or 7 which are the codes used to report Roth IRA conversions.

Tip 2: When converting pretax solo 401k assets such as physical real-estate to a Roth solo 401k, the property must be appraised by a third-party valuation provider to ensure the correct value being converted is reported on form 1099-R.

Tip 3: Once converted the Roth Solo 401k funds can later be transferred to a Roth IRA which is a good planning option because Roth solo 401k plans are subject to required minimum distributions (RMDs), but Roth IRAs are not.

Tip 4: The Roth Solo 401k conversion rules allow for the conversion of after-tax funds provided the solo 401k provider’s plan documents allow for it.

Co-invest with my 401k in a newly formed LLC


My intent is to co-invest with my 401k in newly formed LLC, to be capitalized 24% by 401k and 76% by me. This is to enable funding of land and the design and build of building for purposes of lease to third parties and income generation. Can you explain any particular requirements for such scenario?


To confirm, it will need to be a newly formed LLC which means units have not previously been issued. This is very important as it may be a prohibited transaction if the solo 401k owner also invests personal money in an existing LLC that had previously been funded with his or her solo 401k funds.

Following are some more important requirements:

  • Each member’s interest must be listed on the LLC operating agreement (in this case, the solo 401k and solo 401k owner’s interest);
  • The LLC operating agreement must include language pertaining to the 401(k) and IRS regulations;
  • The LLC cannot incorporate non-recourse financing or recourse financing because the solo 401k owner also invested in the LLC;
  • If the solo 401kowner is the manager of the LLC, he or she cannot receive any compensation;
  • The solo 401k owner can not perform any sweat equity work on properties owned by the LLC;
  • The bank account will need to be opened in the name of the LLC;
  • All income and expenses must flow through the LLC bank account; and
  • From a  solo 401k distribution planning perspective, once the solo 401k owner starts taking distributions from the Solo 401(k), the income has to flow from the LLC bank account to the 401(k) first and then the solo 401k owner can process distributions from the solo 401(k).

Rollovers as Business Start-Ups (ROBS) is not a Participant 401k Loan

When you take advantage of a ROBS transaction to rollover your 401k or other retirement funds to start a new business (or finance an existing business), it is not the same as taking a loan/borrowing from your 401k funds. Instead, you are investing your retirement savings in your own business by directing the 401k to by employer stock in your business–this is also known as an equity investment.

Because the Rollover as Business Startup or ROBS plan is not a loan, there are several important differences for the soon to be or existing business owner to understand, which encompass the following.

  • When the the business owner borrows funds from his or her 401k plan to finance his or her own business, he or she is required to make 401k loan payments (including interest) on a set schedule. As a result, for a new or expanding business, taking cash out of the business to make loan payments can make it difficult for the business to succeed. On the other hand, 401k loan payments are not required if the entrepreneur invests his or her retirement money in his or her own business via a ROBS transaction.
  • You can only borrow a set amount from a 401k. The IRS caps  the 401k loan amount to 50% of the balance not to exceed $50,000; however, a ROBS Business Financing strategy allows you to invest all of your retirement funds in your business because it is a not a loan, so loan payments do not apply.
  • In the case of a 401k loan, if the business fails, the loan must still be repaid, and if the business owner does not make the 401k loan payments he or she will owe taxes and penalties on the unpaid amount. On the other  hand, in the case of a ROBS plan if the business fails/goes under, 401k loan payments do not apply because a  Rollovers as Business Start-Up (ROBS 401k/PSP) is not a Participant 401k Loan.

Given these differences, the entrepreneur may prefer to rollover his retirement funds to fund his own his own business (ROBS 401k) instead of taking a 401k participant loan.

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