What is the Successor Plan Rule & Does it Apply to Solo 401k Plans?

February 2, 2023 | By Mark Nolan

Yes, the successor plan rule applies to solo 401k plans in the same manner that it applies to traditional 401k plans (i.e., full-time employer 401k plans) and 403b plans. The purpose of the successor plan rule is to keep plan sponsors from churning retirement plans including solo 401k plans as well to prevent employers from circumventing the age-59½ early-distribution restriction.

Therefore, if you close your existing solo 401k plan, you are required to wait 12 months from the date of termination (the date the plan’s assets are fully distributed) before your business can sponsor/open another solo 401k plan. As a result, a closed solo 401k plan cannot be replaced by a new solo 401k plan within the 12 month cooling off period.

Therefore, if a new 401(k) plan is started within 12 months of the terminated plan’s liquidation date, certain previously distributed 401(k) assets will be treated as having been withdrawn without a triggering event, which will cause an operational failure under the terminated plan.

Lastly, the following plan types are not subject to the successor plan rules.

Employee stock ownership plans (ESOPs)
Simplified employee pension (SEP) plans
Savings incentive match plan for employees (SIMPLE) IRA plans
403(b) plans
457(b) or (f) plans

Resources:

IRC § 401(k)(10)(A)

Treas. Reg. § 1.401(k)-1(d)(4)(i)

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-plan-terminations

Plan Restatement Solo 401k QUESTION

I have my own plan that I'm holding with Edward Jones. It's using their plan but they don't offer any of the compliance services. They also don't allow voluntary after tax contributions. My understanding is that trying to switch plans would fall under the Successor Plan Rule and I'd need to wait 12 months to start with you. Am I interpreting that correctly?

The successor plan rule would not apply as you would restate the existing plan to our plan.

Essentially, when an existing self-employed 401k plan is restated to a self-directed solo 401k plan, neither a final Form 5500-ez nor a Form 1099-R is required because you are simply changing plan providers from provider A to provider B (My Solo 401k Financial).

You are not required to file a final Form 5500-Z because you are simply switching solo 401k plan providers.

As the Solo 401k provider will easily restate the existing plan when they draft the new Solo 401k Plan Documents (e.g., adoption agreement, Solo 401k Trust Document) by:

Referring to the previous Solo 401k provider Plan Adoption Agreement to obtain the original plan effective date and name of the plan. These two items will then be listed on the new solo 401k adoption agreement along with the new restatement effective date.