IRA rolls into qualified plans

Submitted by MARK SKIBBE on Thu, 2015-01-08 23:27

Have recently had the following questions a couple of times:

1 – For people desiring the ‘back door Roth IRA’ conversion technique, but can’t because of another IRA plan that foils the ratio calculation on the conversion of the non-deductible IRA’s into Roths, can’t the person just establish a, let’s say protype Solo 401k at their broker, and roll the IRA into that qualified plan (assuming the language of the protype allows for that); thereby putting themselves in a position of having no other IRA and, therefore getting the ‘back door’ Roth trick to work?

2 – Can a person roll an IRA into a qualified plan (as in the above example) for no reason other than to get the ERISA protection of a qualified plan vs. the creditor/bankruptcy protection afforded most IRA’s at the state level? I’m not aware of a ‘tracing’ rule that would disqualify the IRA funds once they get into the qualified plan? Some seminar instructors have stated that doing this is worth the annual Form 5500 filing you create by moving the funds into the qualified plan………

What say you?

Mark S.



Submitted by mk foss on Fri, 2015-01-09 00:08

  1. In order to adopt the Solo 401k the individual has to have a business that generates earned income. So this technique would work but logically most people who qualify for the solo 401k may already have one.
  2. The ERISA protection applies if the plan covers employees in addition to the business owner and spouse. If it is a solo 401k, the ERISA protection isn’t available.

 



Submitted by Alan - IRA critic on Fri, 2015-01-09 00:19

Some documentation of the lack of ERISA protection for solo Ks:

Owner-Only Plans Since Patterson, several U.S. bankruptcy courts have ruled that assets in a sole proprietor’s retirement plan may be attached by creditors when the sole proprietor goes bankrupt, holding that a pension plan that benefits only the owner of a small business is not ERISA-qualified. ERISA is meant to benefit common-law employees, the courts have noted, whereas a sole proprietor is an employer. Thus, it is possible for a retirement plan that covers only the owners of a business to be attached by their bankruptcy creditors.Department of Labor (DOL) regulations provide that a husband and wife that solely own a corporation are not employees for retirement plan purposes. The DOL regulations further provide that a plan that covers only partners or a sole proprietor is not covered under Title I of ERISA. However, a plan under which one or more common-law employees (in addition to the owners) are participants will be covered under Title I and ERISA protections will apply to all participants [29 CFR section 2510.3-3(b), (c)(1)]. Thus, inclusion of one or more nonowner employees transforms a non-ERISA plan into an ERISA-qualified plan and thereby protects all the plan assets (including the owners’) from the claims of creditors.As noted in the opinion of several courts, only plans that include nonowner employees as plan participants are entitled to the ERISA protection from creditors’ claims and exclusion from bankruptcy [In re: Witwer, 148 B.R. 930 (Dec., 1992, Cal.); In re: Lane, 149 B.R. 760 (Jan., 1993, N.Y.); In re: Hall, 151 B.R. 412 (Feb., 1993, Michigan); In re: Watson, 192 B.R. 238 (Feb., 1996, Nevada), affd. 22 EBC 1091 (9th Cir., December 1998)]. If a plan files an IRS Form 5500-EZ, indicating that the plan covers only the owner and the owner’s spouse, it is at risk of being included in the participant’s bankruptcy estate and attached by creditors in bankruptcy.



Submitted by MARK SKIBBE on Fri, 2015-01-09 01:26

So if I have a DB Plan and I’m a 100% S Corp shareholder, no employees, not married – aren’t my DB (qualified) Plan assets protected under ERISA as opposed to my state’s own protections afforded IRA plans? ms



Submitted by Alan - IRA critic on Fri, 2015-01-09 02:52

No, there would be no ERISA protection, but you may have state protection. Most, but not all states provide essentially the same protection for IRAs and qualified plans. What state are you in?



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